Masters of our domain: Williams concedes on royalties

As Bond Papers noted on Thursday, part of the Hebron deal will involve a change to the provincial royalty regime local media are characterising as a concession.

The Telegram reported on Friday morning that the province will indeed lower the initial royalty to a flat 1% on gross from an escalating regime that maxed at 7.5% until the project recovered its initial development costs.

After that royalties jumped to a combined 305 in two separate tiers. After simple payout, provincial royalties were based on net profits which provided the companies with a rate of return allowance.

Under the royalty regime for Hebron, the province will collect 1% for as long as it takes the project to recover start-up costs.

The Telegram reports Dunderdale as saying that the royalty then would climb to 5% until the companies exhaust something called a "return allowance". This would represent a new royalty layer not included in previous agreements and also is a piece of information not previously released by the government. No further details were contained in the Telegram story.

Only after the return allowance for the 5% rate is exhausted would the province receive the higher royalty rate of 30%. Terra Nova is currently paying at the 30% level. White Rose will also hit that level within three years of production start up. Hibernia - a considerably more expensive project comparable in some ways to Hebron - is expected to hit the higher tier royalties around 2011, 14 years after production started.

Under the three existing royalty arrangements and the province's generic scheme, royalties are tied to production levels and time, as well as costs. However, the so-called super royalty for Hebron of 6.5% is actually contingent on oil prices being above US$50 per barrel for West Texas Intermediate at a point beyond simple payout and exhaustion of the 5% rate.

The royalty re-arrangement is correctly described as a gamble. It trades guaranteed royalty levels that don't depend on oil prices to exist.

Dunderdale told news media that the changed royalty regime is designed to provide the oil companies with front-end protection - i.e. reduced costs - against plummeting oil prices. Those same low oil prices the companies needed insurance against on the costly Hebron venture would also wipe out the super royalty under certain conditions.

The Telegram reported her comments this way:

"The rationale behind these changes was the companies needed some downside protection if the price of oil went very, very low," Natural Resources Minister Kathy Dunderdale said.

"So, that was the trade off for us — to give them protection if oil prices really plummeted, to get a gain if prices were high, above $50. So, we traded off some risk on the low end for significant gains on the other end."

It's important to note, though, that the lowered royalty scheme in the province's concession essentially provides the protections sought by the oil companies in the first round of talks when they sought tax concessions. Those concessions were rejected at the time by the province.

Premier Danny Williams said in April 2006 that those concessions would have wiped out the benefits of the equity position he was seeking.

In April 2006, Williams also criticised a reduction in the generic royalty regime, considered at one time under Premier Roger Grimes, even though that is essentially what he announced on Wednesday. Grimes considered an adjustment to the royalty regime - including lower initial royalties as Williams agreed to this week - at a time when oil was well below US$50 per barrel.

CBC reported Williams attitude in 2006:

"I've indicated publicly before, when Mr. Grimes offered the more favourable royalty regime, that I wasn't in favour of that," Williams said.

" We now have a situation where we have plus-$55 oil … so there's a lot of profit in the oil industry … and so we expect to get a good return," he said.

The Telegram story - headlined "Province concedes on early royalties" - has been picked up across the country. It appears in Cape Breton Post, and a CBC version is available internationally on the CBC website.

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SOL Special Ballot update: Voting started Monday!

Turns out the eagle-eyed e-mailer wasn't so right after all.

Turns out too, your humble e-scribbler needs to check some fine details sometimes.

Advance voting by special ballot began on Monday, under a set-up proposed by former chief electoral officer Chuck Furey (see story below) and passed in the House of Assembly in June of this year.

The Elections Act, 1991, as amended last spring, allows for anyone otherwise qualified to vote in the province to apply for a special ballot now , get a kit from Elections NL and then write in the name of the candidate, the name of the candidate and party or just the name of the political party he or she wants to cast a vote for.

Who might be affected by this new voting method?

Well, anyone qualified to vote. If you are a "Canadian citizen 18 years of age or more on polling day is qualified to vote at an election if he or she is ordinarily resident in the province immediately preceding polling day," then you can vote.

So like remittance workers who take the Fort Mac express but maintain a permanent residence in the province?

Yep. They're in.

But basically, anyone can vote early provided that, as a minimum, they have a personal reason to believe he or she won't be able to vote on the actual polling day on October 9.

And here's another fun piece of work: under the Act, those ballots will be collected and can be counted before polling day.

The election campaign has been on for months. It got a big boost with the Hebron announcement on Wednesday.

But it will be really interesting to see how many special ballots are cast, let alone how many are cast before the campaign officially starts sometime in mid-September.

We'll know that sometime after October 9.

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The Telegram
November 28, 2006

Voting window could widen to accommodate Alberta exodus

Rob Antle
The Telegram

The province may be losing its workers, but it's hoping not to lose their votes.

Elections officials are proposing changes that would allow voters to cast their ballots nearly two months in advance of the 2007 provincial election, to accommodate Newfoundlanders working out west.

"The idea is to try to make it as flexible and as open and as transparent (as possible), and to give everybody the full opportunity and the fair opportunity to cast their ballots," chief electoral officer Chuck Furey told The Telegram.

In 2004, the Williams administration passed legislation setting fixed election dates every four years. The next provincial election will be held Oct. 9, 2007.

By law, the premier must officially ask the lieutenant-governor to dissolve the legislature and drop the election writs a minimum of 21 days before polling day.

Currently, those who can't vote on election day can cast an absentee ballot - called a special ballot - during that 21-day time period.

Furey said his proposal would allow voters to cast those special ballots up to four weeks before the writ is officially dropped.

"We're trying to say, look, if you've got a fixed-date election, why are we limiting it to 21 days, if we have such a migratory and transient population now? They're coming and going - let's try to capture people and give them a full opportunity to vote by
adding that extra four weeks."

The proposal is currently awaiting a decision by the province.

By law, anyone over 18 can vote in a provincial election as long as they have a fixed address in Newfoundland and Labrador.

There are no official figures on how many transient workers commute to Alberta or other destinations for work while still maintaining a home in Newfoundland.

The Newfoundland and Labrador Statistics Agency does not compile such data, saying it would be nearly impossible to gather and maintain.

But there is ample anecdotal evidence confirming the trend.

An estimated 9,000 people attended an Alberta job fair held in St. John's last month.

Air Canada established a daily direct flight between St. John's and Fort Mc-Murray this year to meet the demand of workers travelling back and forth.

And Canadian North is operating weekly private charter flights linking Deer Lake, St. John's and northern Alberta.

Vincent Pratt, from the Triton area, is one of the commuters using that service.

In a recent interview with Transcontinental Media, Pratt estimated that more than half of the 2,000 people employed at his work camp in northern Alberta are from Newfoundland.

Net out-migration increased to more than 4,100 this year, according to provincial figures.

The most recent provincial population estimate is under 510,000, a drop of about 70,000 since 1991.

Praise from a self-described bastard

There's a small measure of joy that comes from having the Premier mention you - even obliquely - in a news conference, but there is something more satisfying when a self-described bastard weighs in on comments about "some bloggers" in Newfoundland and Labrador and the criticisms thrown around.

Read Craig Welsh for yourself, but here's a snippet for this Friday ego-stroke moment:

Are Ed and Simon, to give but two examples, diehard Liberals? Of course. To say otherwise is foolish. But to dismiss the points they make because they have a Liberal background is even more foolish. They are smart men with enough communications and policy wonk experience on them to choke a horse. They’re going to notice things that the average person, and the average journalist, might miss. To ignore what they have to say is silly. To question their desire to see Newfoundland thrive is idiotic. Their desire to see Newfoundland prosper is greater than their desire to see a Liberal government in power. Never doubt that.

Dissent as they say, or even criticism is not treason.

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Summer of Love 2007 : Vote early!

But don't vote often.

Special balloting for the October 9 general election apparently began on August 20.

The Elections NL didn't issue a news release until today.

That's an interesting timing.

The Elections Act provides that "An application to vote by special ballot may be made to the office of the Chief Electoral Officer beginning not more than 4 weeks before the issue of the writ of election and ending at 6:00 p.m. on a day to be determined by the Chief Electoral Officer."

That provision was added to the act by an amendment approved in the legislature just this past spring.

So what do we know?

Well, the writ will drop sometime within the four weeks from August 20. Most likely the official campaign will be short, lasting only the legal minimum.

However, there's nothing to stop an elector from legally applying for a special ballot this week, getting it before the writ is dropped and having their mind made up - and their vote cast and in the box - well before the official campaign begins.

How many votes will be cast before the writ of election is actually issued?

We'll know on October 9.

Anyone doubt now that the election campaign has already been unofficially under way since late June?

Update and correction: An eagle-eyed e-mailer pointed out an obvious point. The ballots can't be mailed until after the writ drops and Elections NL nominations close.

Still.

It'll be interesting to see how many people apply and vote early.

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Masters of our domain: the [insert list of superlatives here] deal in the history

In 2002 and 2003, then-opposition leader Danny Williams made a big deal out of demanding to see not only the memorandum of understanding but the final legal text of the agreement to develop Voisey's Bay.

Then Premier Roger Grimes relented to the attacks, tabled the MOU in the legislature and out it to a free vote in the House. It passed with a couple of opposition members bucking the party line to vote with the government members.

Fast forward to Williams' own MOU on Hebron. As Premier Danny Williams is touting the need for near complete secrecy as a "normal" part of deals like this. He even chided reporters for getting too close to the copy of the document he waved about during the hastily called news conference announcing the tentative deal.

Asked about putting the deal in front of the legislature, Williams told reporters he "hadn't even thought about it" but that the deal was so good ratification would not be a question. Not really the point, though since as a government measure the thing would pass in all likelihood anyway. Not really the point either since Williams' set the standard by which he'll be measured on the very sort of issue of openness, transparency and accountability

Members of the opposition have been asking Williams to release the document.

Such is the story that both CBC's Here and Now and The Telegram carried stories today highlighting the stark contrast between Danny Williams then and now.

But "hadn't thought about it?"

Natural resources minister Kathy Dunderdale, taking a leaf from her boss' copy of Hyperbole for Beginners, publicly defend the cone of silence on the MOU on Thursday by referring to the current administration as the most open, accountable and transparent administration in the province's history.

Dunderdale, who buggered up a simple explanation of one aspect of the deal during a radio talk show appearance today, even trotted out the old thin-skinned line about supposed personal attacks by the opposition on the Premier and his ministers.

Hadn't thought about it? It only begs the question of how the most open, accountable and transparent administration in the province's history did not think about public disclosure.

Of course, they thought about it.

They thought about it as they agreed with their co-venturers in the oil business to keep the whole thing under wraps.

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Incidentally, there's likely a bit more to this issue than the mere claim by "outs" about the nefarious ways of the political "ins", as some have suggested; but that is for another post.

For the record, here are two Canadian Press stories from 2002 on the Voisey's Bay dust-up.

As a curiosity, note that the energy minister at the time was Lloyd Matthews. His daughter worked as communications director with the Liberal administration at the time, including a stint handling comms for current opposition leader Gerry Reid while Reid was provincial fisheries minister.

Where is Lloyd's daughter today?

Well, Elizabeth Matthews bolted from Reid's office suddenly and surprisingly, shortly before the 2003 election to take up a job with Danny Williams.

The rest, as they say, is history, although playing six degrees of separation among the political classes in the province is obviously a fool's errand.

Nfld. premier trying to avoid scrutiny of Voisey's deal - opposition

May 2002

St. John's, Nfld. (CP) -- The only thing standing in the way of an agreement to develop the fabled Voisey's Bay nickel mine is a signature from Newfoundland Premier Roger Grimes, the province's Conservative Opposition leader said Monday.

But Danny Williams said Grimes is stalling because he doesn't want to close the deal and face public scrutiny while the legislature is still sitting.

"Newfoundlanders and Labradorians can sense that a bad deal is about to be made," Williams told a news conference. "Why won't he debate it in the House of Assembly? What is he trying to hide?"

Grimes was out of the province Monday attending an oil industry conference in Houston. But the province's mines minister, Lloyd Matthews, confirmed talks with mining giant Inco Ltd. -- owners of the $4.3-billion mineral deposit -- were in their final stages, though the outcome remains unclear.

"Over the next several weeks, one way or the other, we should bring resolution and clarity as to whether or not there will be a deal," Matthews told the legislature.

Matthews said a number of key issues remain on the table, but no meetings are scheduled with Inco because the company is in the midst of negotiating the terms of benefit agreements with Labrador's main aboriginal groups, the Innu and Inuit.

Williams said while the premier and minister have been coy about discussing the prospects for a deal this spring, executives with Toronto-based Inco have been dropping hints at every opportunity.

Indeed, Inco chief executive Scott Hand has said he hopes construction can begin at the site in northern Labrador by next month.

Meanwhile, there are indications the company has already lined up a contract with the Quebec engineering firm SNC Lavalin, Williams told the legislature.

Earlier, Williams suggested the deal will be announced some time during the last two weeks of this month, after the legislature adjourns for the summer recess.

Wants Debate

Williams said the deal should be brought before the house for debate to ensure the province gets the best deal possible. But Grimes has already rejected that request on the grounds he is not obligated to submit such a business deal for legislative approval.

Grimes will try to avoid public scrutiny of the deal because the Liberal government will be forced to admit it has abandoned the tough stand taken by former Liberal premier Brian Tobin, Williams said.

Tobin won widespread public support when he insisted all the ore extracted from Voisey's Bay had to be processed in Newfoundland. He won two general elections by repeatedly declaring the province wouldn't give away its raw resources so that others could profit from processing the ore into finished nickel.

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All fired up: Opposition politicians expected to demand details of Voisey's Bay deal as House opens

Michael MacDonald (Canadian Press)
Monday, June 17, 2002

Opposition politicians will have one, simple question for Premier Roger Grimes this week when the Newfoundland and Labrador legislature holds a special debate on the Voisey's Bay mining project: Where's the legal text?

The question stems from the Liberal government's decision last week to sign a tentative, $2.9-billion development deal with Inco Ltd. based on a so-called statement of principles, rather than a legally binding commercial agreement.

"That's where the truth lies - the devil is in the details," said Ed Byrne, the Conservative house leader. "About 95 per cent of the details have yet to be negotiated."

During the debate, which starts Tuesday and culminates in a historic free vote Thursday, Conservative Leader Danny Williams will argue the final draft must be held up for public scrutiny.

Grimes has said the legal text will be drafted behind closed doors by a team of lawyers from Inco and the provincial government by Sept. 30, but it won't be up for debate.

The three-day debate on the statement of principles should provide skeptics with all the details they need, he added.

"There are some legitimate concerns, with people seeking a little more information," Grimes told The Telegram on the weekend. "They're looking to have a little better comfort level. ... I think people will have a greater level of comfort after the debate."

Scott Hand, Inco's chief executive, dismissed the Tories' demand for the legal text.

"The statement of principles is a very detailed document," he told reporters last week after speaking to the St. John's Board of Trade. "It really sets out all the commitments, guarantees and remedies required. ... The legal agreement will reflect that quite clearly."

But some observers aren't so sure.

"What about the final deal itself?" asked Peter Boswell, a political science professor at Memorial University. "Is that going to come before the house? If not, then that's why this whole thing is a charade."

Echoes of Charlottetown accord

Boswell said the political sparring over the Voisey's deal reminded him of the debate 10 years ago over the Charlottetown accord - another in a line of ill-fated attempts to bring Quebec into the constitutional fold.

The accord was rejected by 54 per cent of Canadians in a national referendum, but not before popular opinion forced the federal government to release a legal text.

"There's a lot of things in this statement of principles that are open to change," said Boswell.

"The free vote is almost like a public relations exercise. They're just going through motions."

Still, the debate in the House of Assembly could offer direction to the lawyers drafting the final documents, he said.

Too many loopholes: Williams

For example, Williams has suggested the statement of principles contains too many broad exemptions and escape clauses for Inco, which could lead to long delays in the project.

He zeroed in on something called the force majeure clause, which excuses the company from meeting its obligations if it is beset by shortages of supplies, accidents, breakdowns or inflated prices for raw material.

"I've looked at hundreds of these during the course of a legal career," said Williams, who worked as a high-profile lawyer for 30 years before he was acclaimed Tory leader last year.

"This is the weakest, broadest one I've ever seen. There's things in here that are ridiculous."

Provisions "normal"

Not to be outdone, Hand said he's seen more force majeure provisions than Williams has.

"I've been a lawyer for 32 years," he said.

"It's very normal. It's fundamental for financing. It doesn't eliminate our obligations. All it can do is suspend it for a little time."

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Master of our own domain: Give-aways? Did I say give-aways?

From labradore, a little tidbit buried in the middle of a long and detailed dissection of Premier Danny Williams' changing views of the Voisey's Bay deal:

"The video is available on the CTV web site (on the right-hand side, select "CTV Newsnet: Danny Williams answers media questions 7:27", ... .)

At about 1:44 into the video file, in response to a barely-audible question comparing the Hebron MOU to the Voisey's Bay Statement of Principles that he famously condemned, Danny Williams made this amazing concession:

Well, you have to put that in context, there were other issues with regard to that MOU that we had concerns about at the time, and I’m not gonna get into this, because I don’t want to diminish this announcement by diminishing that project, which is a good project, and I’m prepared to say that.

There you have it: Voisey's Bay. Not a giveaway. A good project. Not to be diminished. Danny says so. "


Geez, that wasn't really the first thought that comes to mind when a guy goes from saying something was a give-away or a badly negotiated deal to acknowledging exactly, diametrically, 180 degrees the opposite.

Bully for him for admitting he was wrong five years ago.

or last year, for that matter.

Kinda makes you wonder, though, when Danny Williams came to the conclusion that Voisey's Bay was - in his own words - a good deal.

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Ethics and professional integrity

An eloquent rejoinder to recent smears, from Geoff Meeker.

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Masters of our domain: national and international reaction

1. Financial analysts are reacting favourably to news of a pending deal to develop the Hebron oil field offshore Newfoundland.

From the National Post:

For producers like project leader Chevron Corp., as well as Exxon Mobil Corp., Petro-Canada and Norsk Hydro, the good news is that the basic royalty rate remains unchanged at 1% until costs are recovered, UBS analyst Andrew Potter told clients in a note. Previously, this rate increased progressively from 1% to 7.5%.

The bad news: A “super royalty” of 6.5% of net revenue after payout (when oil prices are above US$50 per barrel) has been included.

Mr. Potter thinks the new deal is fair to both parties, adding that these fiscal changes will not make a major difference.

For Petro-Canada (PCA/TSX), the government acquisition values Hebron at $1 per share, in line with the analyst’s revised net asset value for the project. His previous estimate was approximately $1.40 per PCA share, but this was been reduced due to higher capital costs and a later start date.

Note that industry analysts consider it positive that the provincial government's royalty rate has been set at a flat 1% until payout.

Note as well the valuation of the share price in the project. The delay in the project and higher capital costs had the effect of devaluing shares from CDN$1.40 to CDN$1.00.

2. Editorial opinion at the Edmonton Journal holds there may be a lesson in Hebron for Alberta Premier Ed Stelmach who, the newspaper contends, should seek a greater provincial return from the oil industry.

3. Chevron Canada president Mark Nelson told the National Post the provincial government equity position is simply a different way for the provincial government to collect its revenue. That may be a clue that the secret memorandum of understanding contains little if any management power for the province's newly minted energy corporation.

The equity stake comes with an acquisition cost of CDN$110 million, plus potentially up to $540 million in development costs. Potential gross revenue from the 4.9% share would be $2.45 billion over the 25 year estimated lifespan of the project, assuming an average price per barrel of $70. At $50 per barrel, the gross revenue would be approximately $1.5 billion. The cost estimate does not include any other undisclosed liabilities.

4. The Globe and Mail's energy reporter includes some interesting information in his latest story, but concludes with a bizarre claim that the equity position costs may affect the province's entitlement to Equalization:

On the face of it, Mr. Williams's [sic] insistence on an equity position in Hebron could reduce the government's revenues in the medium term, which could make it more likely it would once again receive equalization payments. That's because the Premier has given Newfoundland and Labrador Hydro a mandate to invest heavily in oil and gas and other energy projects - a policy that will divert revenue from general government coffers to the Crown corporation.

Newfoundland and Labrador will no longer qualify for Equalization in the 2009-2010 time frame without Hebron. Under enabling legislation, the newly minted energy corporation is empowered to borrow up to $600 million to finance its operations. As such, there is no diversion of revenue from provincial government coffers.

5. Reaction from some in western Canada's oil patch is mixed, as Report on Business indicates:

Peter Linder, managing director with DeltaOne Capital Partners Inc., said Newfoundland's reputation as a place to do business will get a boost with the Hebron deal but questioned why the province felt it needed an equity stake, given that it owns the resource and would collect a royalty.

"As long as they get their fair share through royalties, why do you need to own equity? I think the equity for Newfoundland is strictly politically motivated."

6. The Chevron/Hebron story made the New York Times. The Times story refers to a royalty base rate of 30%

The tentative pact with the oil companies, he added, also includes an extra 6.5 percent royalty, on top of a 30 percent base rate, and removes the special investment tax credits that the oil industry had demanded.

That version turns up in many of the financial reports. One implication is that lowering royalties at the front end of oil development may be part of a longer term government policy to increase the attractiveness of the local offshore.

Providing an equity stake without management powers might actually minimise the potential total cash cash outlay for operators while helping to defray costs among the operators at the front end. Coupled with a lower royalty regime, the local offshore could become more attractive to investment.

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Masters of our domain: province lowers royalty for Hebron pre-payout phase

"I've indicated publicly before, when Mr. Grimes offered the more favourable royalty regime, that I wasn't in favour of that," Williams said.

"We now have a situation where we have plus-$55 oil … so there's a lot of profit in the oil industry … and so we expect to get a good return," he said.

Opposition leader Danny Williams, commenting in 2003 on a proposal by the Grimes administration to lower the royalty regime as an incentive to develop the Hebron oil field

Under the memorandum of understanding announced today by Premier Danny Williams, the provincial government will amend the province's royalty regime to apply a flat 1% royalty levy instead of the progressively increasing royalty regime applied to other projects that raised royalties to as much as 7.5% before the project recovered development costs.

The Hebron partners dropped requests for tax concessions that originated in the first round of negotiations. Asked by reporters about the tax concession demand, the Premier stated the demand had been dropped but did not indicate why.

The value of that concession, suggested by the Premier to be worth $500 million, might well be accommodated by the decreased initial royalties. He told the Financial Post:

"It was a significant move," Mr. Williams said in an interview. "They looked to us to do something. We said we will take our [offer to purchase a 4.9% stake] from $100-million up to $110-million, and then we also took our 7% super royalty ask ... to 6.5%, and we tweaked the timing of payment, and that is basically the deal."

The Premier made similar comments during the news conference, as indicated in CTV Newsnet , but made no mention of the change to the province's royalty regime covering the pre-payout phase.

The backgrounder for the Hebron memorandum of understanding refers to a change to royalty regime to "[p]rovide downside royalty protection by keeping the basic royalty rate at one per cent of gross revenue until project costs are recovered (i.e. simple payout)."

This is extremely curious phrasing since there is no obvious need for "downside royalty protection." Royalties are established by the provincial government under the terms of a development agreement. Since the late 1990s the province's generic regime is intended to apply to projects unless altered through negotiations. It establishes 1% as a floor.

Throughout Hebron discussions, Premier Danny Williams insisted one of his goals was to achieve better royalties than previously earned. He stated that the Hebron MOU announced on Wednesday delivered "unprecedented benefits".

In April 2005, Bond Papers first raised the possibility of an entirely new royalty regime for Hebron and noted the possible risks. this was before the Premier introduced the idea of a provincial oil company with an equity stake in the project.

The provincial government's generic royalty regime for offshore projects - developed in 1996 - clearly establishes the minimum initial royalty to be paid to the provincial government is 1% of gross revenue. This increased progressively based on time and production levels until it reaches 7.5%. it remains at this level until simple payout - the recovery of start-up costs - is achieved. At that point significantly higher royalties begin.

The Terra Nova project achieved simple payout within three years of first oil and currently returns 30% royalties to the provincial treasury. White Rose is expected to achieve simple payout within the next year.

The new super-royalty regime, referred to more accurately as Tier Three royalties by the oil companies, actually doesn't appear to replace this decreased initial royalty. The provincial backgrounder states:

The new super royalty for the province is an additional 6.5 per cent of net revenue at higher oil prices (>US$50 WTI/bbl) after net royalty payout;

As the Hibernia royalty regime indicates "Net Royalty consists of a two tier profit sensitive royalty which becomes effective when Net Royalty Payout occurs." Net royalty payout is the "point in time when the costs related to a particular project are recovered plus a specified return allowance on those costs." A similar concept exists in the province's basic offshore royalty regime.

The provincial government will thus not qualify for this added royalty until after simple payout of the project and only provided that certain additional hurdles are met. One of those hurdles is the requirement that oil prices must be above an average of more than US$50 per barrel for West Texas Intermediate crude oil.

If Hebron first oil is achieved in 2015, simple payout is unlikely to be achieved before 2015 unless oil prices remain in excess of US$70 per barrel for an extended period of time.

Natural resources minister Kathy Dunderdale today estimated the project may produce provincial revenues of $16 billion, but this figure must now be held in doubt until the provincial government releases more information.

On the face of it, Dunderdale's figure appeared to be nothing more than an adjustment of Wade Locke's 2006 estimate that put revenues in the range of $8.0 to $10 billion over the life of the project. Locke based his estimate on the existing royalty regime and an assumed average oil price of US$50 per barrel. Dunderdale's figure appeared based on an assumed value of $70 per barrel. However, Locke did not use the modified regime announced on Wednesday.

It is not clear if the equity position would offset the decreased royalty either. Premier Danny Williams said in April 2006 that the 4.9% equity would provide merely an additional $1.5 billion to the province.

According to Wednesday's announcement, the equity stake will cost the province $110 million to acquire plus potentially as much as an additional $539 million as a share of costs, based on the provincial government's development cost estimate of upwards of $11 billion for the project. An revenue coming from the equity stake will accrue to the province's energy company and not to the provincial treasury directly.

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Waiting for the "real deal": deconstructing the Hebron announcement

"That's the details...That's where the deal gets done. That's where the off-ramps are. That's where the security is for the people of Newfoundland and Labrador. ... We want to see the real deal."

Danny Williams, Leader of the Official Opposition, June 2002

At 10:00 AM on August 22, 2007, Premier Danny Williams will hold a news conference and announce a miracle.

[Update 0745 hrs 22 Aug: According to CBC Radio's David Cochrane, the news conference will take place at 11:00 AM or noon. Bond papers understands it will involve only Premier Williams. As Cochrane indicated, there is no final and binding legal agreement but rather a general statement of principles (see below). Cochrane compared the situation to Voisey's Bay (again, see below), and acknowledged that there may not be an agreement reached. Cochrane dismissed the prospect given that both sides need a deal.]

The Premier will announce a deal to develop Hebron in which he negotiated every single one of his demands successfully at no or virtually no cost.

The reality is starkly different, if for no other reason than what the Premier is likely to discuss on Wednesday is not a complete agreement but rather a memorandum of understanding [MOU], a statement of principles to guide further talks that in itself is not legally binding on either party. According to some indications, the MOU will be kept confidential.

The details of the development agreement for Hebron remain to be negotiated.

The Hebron announcement will be starkly different from the position Danny Williams took as opposition leader in 2002 on the Voisey's Bay deal, although the circumstances are virtually identical.

As a Canadian Press story put it in June 2002:

But critics on the opposition benches warned a monumental bungle is in the making because the vote [in the House of Assembly] dealt with an 18-page statement of principles, not a legally binding commercial agreement.

"It's the worst ... document I've ever seen," Conservative Leader Danny Williams said outside the legislature. "It's not even a legal document because it's not legally enforceable. We as a people are being insulted by being asked to vote on this."

The legal text, which could comprise up to 150 pages of dense terminology, will be drafted by lawyers behind closed doors later this fall.

For the past nine days, Williams insisted the final text, not statement of principles, should be debated and put to a vote in the legislature.

"That's the details," he said. "That's where the deal gets done. That's where the off-ramps are. That's where the security is for the people of Newfoundland and Labrador. ... We want to see the real deal."

Effectively, Newfoundlanders and Labradorians will be voting on a Hebron statement of principles come October 9 but without the details which, as Danny Williams himself put it five years ago, is "where security is for the people of Newfoundland and Labrador."

It would be even more ironic - if that is even possible - were the Premier to make a comment along these lines on Wednesday: "We're completely satisfied we have all of the provisions that we need, all of the stop-gap measures, all the guarantees."

To give a sense of what likely won't be known on Wednesday with any certainty, consider these points:

1. Super-royalty: There will apparently be a provision covering special royalties while oil is priced above a certain dollar amount per barrel. There has been no public discussion of how this would work and hence there is no calculation of how this regime will interact with the other royalty regime.

It is conceivable that the province's existing royalty regime has been supplanted by an entirely new one - never publicly disclosed - complete with different triggers, different calculations and therefore different potential cash values to the provincial treasury.

Wade Locke's assessment of Hebron royalties of $8.0 to $10.0 billion over the 20 year lifespan of the project may well need to be replaced by an entirely new set of calculations.

Unless details of the royalty regime are released, there will be no way for an independent analyst, such as Locke, to assess any provincial government claims about royalties.

2. Equity stake. There will be a 4.9% equity position for the provincial energy company, according to media reports. Expect the provincial government will pay a fair market price - yet to be determined - for the stake and that the energy company will also bear its share of project development cost and downstream liabilities.

Those points have been at the heart of the oil companies' position on equity. The Premier has essentially accepted them already publicly when he stated that the provincial government would pay fair market price.

The problem for the public will come in assessing the real value of the equity stake. Premier Williams gave it a net value of only $1.5 billion over the life of the project based on discussions up to April 3, 2006. It is possible that in accepting operator risk - something the province has eschewed until now, apparently - the net cash value of the equity stake will be near zero.

The Premier has never publicly indicated any other value to the province of the equity stake and establishing an oil company.

[Update: CBC's David Cochrane attributed to Premier Williams acquisition cost of $150 million to the equity position. On the face of it, this is ridiculously low. If Hebron development cost were $5.0 billion, then 4.9% of that alone would be $245 million.

Added to that cost must be the share of other downstream costs and liabilities. If getting into the oil business on a project like Hebron - estimated gross value of US$25 to US$35 billion- was that cheap, everyone would be in it. ]

3. Local benefits: One of the major issues in the 2005/06 negotiations was apparently the amount of work to be done within the province. This remains an significant issue, made more acute by outmigration since April 2006.

Any provisions of the agreement which establish local benefits as work commitments must take into consideration the local labour market and the local industrial capacity in the context of a major construction project at Long Harbour, the likelihood that the Lower Churchill will start within the next three to five years, and the possibility that one or two other major construction projects at the northeastern end of Placentia Bay would also tax the local industrial capacity.

One way of coping with the issue would be to allow work - such as the topsides - to be shipped out of the province for completion based on certain conditions being met. As well, the provincial energy company may opt to slow work on the Lower Churchill or allow that project to export components or outsource supplies to ensure that Hebron can meet its first-oil target.

Since there are a limited number of facilities in the province capable of constructing some of the larger project components, a project such as the Joint Support Ship for the Canadian navy, might take a facility such as the Marystown yard out of contention for one or the other project.

The superheated Alberta construction marketplace has already taxed some aspects of the national labour supply. Challenges would exist in finding enough skilled workers in a relatively tight time frame to complete the planned and potential major projects across Canada, including the ones listed above.

4. Conflict of interest: Bond Papers raised this issue specifically focused on Ed Martin, the chief executive of Hydro who headed the 2006 negotiating team. The conflict remains, even though this round of negotiations appears to have been headed by the Premier himself.

Fundamentally, any political demands that insist on work being done in the province have to be paid for by some party.

Given that the provincial government is almost certain to become an operator, it is now faced with the dilemma. As an operator, it would seek to lower costs and thereby maximize profit which would flow ultimately to the provincial treasury. As a provincial administration interested in maximising local work, it would seek to maximize that local work irrespective of costs.

Until now, those interests were aligned: lower costs meant higher royalties.

Beginning with this agreement - when and if the details are finalized - the provincial government faces an internal conflict of interest not seen since the Peckford administration and negotiations on Hibernia.

How that conflict is resolved will determine much of the value of the final agreement, when and if it is reached.

5. There has been no public discussion of potential research and development work related to Hebron, let alone what the requirements might be.

6. Tax concessions: One sticking point for the provincial government in 2006 was a demand by the companies for a sales tax exemption for the construction phase of the project, similar to an exemption granted to Hibernia, as well as the creation of an investment tax credit.

Tax concessions - although not characterised as such - might form a part of this agreement as a mechanism to lower operator costs on an already difficult and costly project.

7. Dates and timelines. Some 18 months have already been lost on the project. The operators disbanded the project management team in 2006.

That team now must be assembled again.

The details of the agreement with the provincial government must be negotiated.

A development application must be submitted to the offshore regulatory board. The board must review the application, adjust portions and hold public hearings before the project can be sanctioned.

Even allowing some concurrent work, it is likely that first oil from Hebron will not be achieved much before 2014.

8. Hibernia South. As much as the parties attempted to downplay it, it appears that the provincial government's rejection of Hibernia South development was linked to collapse of the Hebron talks.

Some aspect of this MOU may include a side agreement to expedite development of Hibernia South, with the province essentially abandoning any demands for additional royalties and developments from the 300 million barrels of oil in the Hibernia extension. Hebron - the subject of the current discussions - is estimated to contain slightly more than 500 million barrels of heavy, sour crude oil.

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Hebron go ahead

From the National Post:

However, the gambit appears to have paid off. According speculation in Newfoundland Tuesday, he will announce a memorandum of understanding in which he won a 4.9% equity stake in Hebron for the province as well as a super royalty that would increase with oil prices -- demands that the oil companies would not agree to a year ago.

But Ed Hollett, a public policy commentator in St. John's, said it's possible the oil companies won concessions of their own, including tax breaks and an agreement to be able to do a lot of the work outside of Newfoundland. Mr. Williams had insisted that Hebron be built in the province.

"If by some miracle he got everything that he wanted, and the companies got nothing that they wanted, then he is the most brilliant negotiator in the universe," Mr. Hollett said. "But I have never known a negotiation that looked like that. Until we know the specifics, we don't know what this is all about, whether we have been diddling around for 18 months for nothing."

And from the Globe:

The deal will allow the province to earn a 4.9-per-cent equity stake in the project, and has a royalty regime that will ensure the province earns a greater share of the proceeds from oil production than it has from existing offshore projects, sources said last night.

Mr. Williams has been widely criticized for his insistence that the province gain an ownership stake in the project, with some critics dubbing him "Danny Chavez" after the socialist president of Venezuela, Hugo Chavez.

But the Premier — who faces an election on Oct. 9 — is wildly popular in his home province partly as a result of his battle with the international oil companies, as well as his heated disagreement with Prime Minister Stephen Harper over equalization.

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Breaking: Hebron deal?

From Cochrane's Crackberry - and discussed live on CBC's Here and Now - and the Financial Post online, word that there might be an announcement tomorrow on Hebron.

More to follow...

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LiberalOz to reconsider Long Tan gallantry awards

Australia's Liberal government will reconsider awards given to members of the Royal Australian Regiment who participated in the battle at Long Tan, Republic of Vietnam 41 years ago.

Left, a typically-laden Australian infantryman advances through jungle terrain, somewhere in Vietnam. [Photo: Australian War Memorial, AWM WAR/70/26/VN]

Approximately 100 Australian infantrymen, from D Company 6th Battalion The Royal Australian Regiment fought off attacks by an estimated force of 2500 Viet Cong guerrillas and North Vietnamese Army regulars.

Operation SMITHFIELD was opened by a mortar and recoilless rifle attack on the Task Force area on the night of 16/17 Aug 66. B Company was initially dispatched to clear the area to the east of the Task Force base. D Company took over from B Company on 18 Aug 66. D Company made contact with the enemy force of regimental size and were soon under attack from three sides. The battle was fought into the night under a blanket of mist and heavy monsoonal rain, but D Company held its ground with heroism and grim determination. The remainder of the Battalion deployed to aid the beleaguered Company. With the help of armoured personnel carriers of 3 Troop, 1st APC Squadron they hit the flank of a battalion size force which was forming up to assault the rear of D Company, inflicted many casualties and forced the enemy from the battlefield. A Presidential Unit Citation was awarded to D Company by the then President of the United States, Lyndon B. Johnson. 18 Aug is now commemorated each year as Long Tan Day, in memory of the eighteen soldiers who gave their lives in battle.

Between Aug 66 and its departure to Australia in Jun 67, 6 RAR took part in seventeen more Battalion operations and supported a number of 5 RAR operations. These operation, along with the routine patrolling around the Task Force area, graduallywrested control of the Province from the Viet Cong. Twenty three members of the Battalion received gallantry awards for the tour and 37 members gave their lives.

At the time, the Australian government downgraded the recommended decorations and prevented the South Vietnamese government from recognizing the soldiers involved. In 2004, the soldiers were permitted to wear the South Vietnamese decorations. The company commander, for example, was originally recommended for the Distinguished Service Order, but this was downgraded to the Military Medal. The United States government awarded the company a Presidential Unit Citation, which was accepted.

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SOL: The Ontario Version

The Globe and Mail recently gave Dalton McGuinty some advice on his version of the Summer of Love.

Their advice would be well received in the eastern reaches of the country as well.

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Getting in the quota

Odd that a news release emerges, in the third week of August, from the provincial government department known as InTRD, about an event at Memorial University, that Memorial University didn't talk about when it occurred, that involves an issue that actually relates to natural resources..

Then again, it isn't odd when one considers:

1. That this is polling month;
2. That all departments are required to pump out good news when they can, but especially in polling season; and,
3. That the Boss must get credit.

That's exactly what the lede of the release indicates, the lede - by definition - being the most important, newsworthy thing, about the subject at hand.

"A letter of intent signed in Ireland during a trade visit led by the Honourable Danny Williams, Premier of Newfoundland and Labrador, in February 2007 to produce closer ties between the oil and gas industries of Newfoundland and Labrador and Ireland, is generating results."

Exporting our expertise?

Nope.

Developing the oil and gas sector?

Nope.

The MOU Danny signed is working?

Bing! Bing! Bing!

And even though the event happened a month ago, the "news" of this is released in August, likely to fill the quota of Happy Face News (TM) during the most important polling season of the past four years.

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Is it wind or hydrogen?

Some time ago, Frontier Power Systems registered a wind demonstration project on Ramea.

The project received some international attention, including this presentation at an American alternative energy conference in 2004.

The project was supposed to be a combination of wind and diesel, but an announcement earlier this year mentions inclusion of a newly developed hydrogen fuel system. The announcement indicates the client is Natural Resources Canada, not Frontier. A similar announcement directly from the hydrogen system manufacturer isn't any more clear.

We'll keep you posted on the results of further inquiries.

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Exxon signs rig for Indonesian drill program

ExxonMobil has signed a deal with Seadrill to use its West Aquarius ultra-deep water semisubmersible rig for exploration offshore Indonesia.

The three year lease is estimated to cost US$570 million.

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Soldier killed in Afghanistan

Private Simon Longtin was killed in Afghanistan yesterday when the vehicle in which he was riding struck an improvised explosive device.

Private Longtin served with Charlie Company, 3rd Battalion, Royal 22nd Regiment.

Private Longtin's remains will be returned to Canada in several days. A recent story from the Globe and Mail, discusses part of the journey.

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So how much is fair, exactly?

When it comes to oil and gas royalties, there's a debate in Alberta.

There's no debate in Newfoundland and Labrador. Mostly there's a pile of misinformation, most of it flowing from the provincial government.

Well, for those who like to think to thoughts, to dare to be different and - oh, horrors - consider that the Powers-That-Be might just not be right about everything, here's another perspective, via the Globe.

Note particularly, the chart on the left comparing various jurisdictions.

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The bonfire of the vapidities

It's called a strawman. [Right: The ultimate strawman, Guy Fawkes, is set alight in one of the annual celebrations of the defeat of The Gunpowder Plot. Photo: Daily Mail.]

A strawman is a caricature of a position taken by one's opponent in a debate or discussion. In order to defeat the argument, one builds a strawman - a convenient caricature - and then sets it alight by explaining how foolish or ridiculous or misguided the opposing argument is.

Except you aren't really dealing with the argument at all. You are dealing with a fiction, a fantasy, a fabrication. It's an illusion.

The Telegram's editorial page editor, Peter Jackson, does a fine job of building strawmen in his column this week on the decision by the provincial government to establish Sir Wilfred Grenfell College as a second university in the province.

He starts out with some generalities about the evil news media assuming politicians have bad motives. Then he praises Brian Tobin for "decisively" ending denominational education and for building The Rooms. With that armature built, Jackson then adds the straw:

It has become de rigueur among many political observers of late to characterize absolutely everything Premier Danny Williams does as a Machiavellian attempt to manipulate polls. While it’s true certain spending initiatives and photo ops are tailored for maximum impact, one can hardly assume that a continued hold on the reins of power is the sole motivation behind every government decision.

Let's set that vapid statement alight before it goes any farther.

"A continued hold on the reins of power" is most decidedly not "the sole motivation behind every government decision" and Jackson constructs a rather flimsy strawman in this paragraph. Nor is it a townie versus baymen thing, as much as the provincial government has tried to paint it that way. Jackson picks up that thread at one point, although using the more politically correct phrasing of Grenfell as an issue affecting a "rural" constituency.

Rather, the point often made at Bond Papers and elsewhere is that the communications part of a government decision is less about providing information to foster discussion or promote understanding as it is more about creating an illusion of some kind or of simply justifying a decision already taken. It's the media blitz that is designed to help goose polls inf avour of the government crowd.

For good measure, Jackson then attempts to caricature those who have raised questions about the Grenfell decisions, labelling then as either "the same administrators on whose deaf ears Grenfell’s pleas for more consideration fell for so long,"...or "those who have nothing but contempt for anything remotely associated with Danny Williams."

Again with the strawmen and, in effect another vapid statement. Jackson ignores the way the government bunch decided about Grenfell, just as he ignores the detailed arguments involved in the debate. In fact,  Jackson conveniently ignores anything of substance in the debate so that he can skip on to his own simplistic view: Those who oppose the provincial government on this issue are either the evil oppressors of the noble people of Corner Brook or those who, to borrow a phrase, believe that Premier Danny Williams can't walk and chew gum at the same time. Or was it tie his own shoe laces correctly?

Jackson then praises the existence of a discussion on Grenfell's future, ignoring entirely that he just finished identifying those who question the provincial government's decisions as not warranting attention. After all, they are either The Man or The Cynics on the "Bad" side and Jackson's friends on the Good, as Jackson has so conveniently populated the world of straw in which the "discussion" takes place. Why pay any attention to the baddies at all?

It is a debate that has simmered for some time, but has exploded since the government announced its plan to forge ahead with restructuring.

It is a debate that will likely go on for some time.

This can only be a good thing. It is important that the pros and cons of autonomy be thoroughly discussed in the public arena.

Jackson's world exists almost entirely in his own head. He manufactured the various positions and just as simplistically manufactured the good of a "debate" which in fact does not exist.

The deal on Grenfell is done and has been done since before the consultants were hired. It would have been important to discuss the Grenfell issue publicly before the decision was made. It would have been important to hear all sides, rather than cavalierly dismiss valid criticisms, as Jackson does here. The debate Jackson praises is as much an illusion as the straw men he vanquishes.

And as for the accusations of politicking, one would be naive in the extreme to simply leave them unexamined in any major decision taken by any government anywhere at any time. Politicking, it should be noted is not synonymous with partisanship, the main element of Jackson's armature. In the case of Grenfell, one suspects that another politician of another party in the same situation might well make the same decision: and without any of the niceties of debate, discussion or even a plan to hinder the drive to make a particular constituency happy irrespective of the viable alternatives or the cost.

It's not like we haven't seen that before, say, in the case of The Rooms.

Just as it isn't like we haven't seen the straw men and the bon fire before.

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