Reality would be nice for a change

From the House of Assembly:

PREMIER WILLIAMS: Thank you, Mr. Speaker.

In all fairness to the hon. Leader of the Opposition, she wasn’t there in the scrum yesterday when I indicated exactly what the government’s position was, but I am at a loss to understand - in a situation where CUPE have already accepted what is considered to be a very, very generous wage package of eight, four, four and four over four years, which is front-end loaded, which compounds outs to be 21.5 per cent, we have now seen that PSAC, the public service union, has accepted 6.8 per cent over four years, the Prime Minister of the country, who has referred to the present economic situation as a dangerous situation, and he has also referred, after the G-20 meetings, to it as a near-depression possible situation, and just this afternoon we heard the Opposition House Leader refer to it as a crisis – under those circumstances I am at a loss to understand why I would be considered to be threatening unions when I am indicating to them that if, in fact, the prophecies of the Prime Minister, or even the Opposition House Leader, actually come true and we end up in a depression or a near-depression situation, why they would not take a 21.5 per cent offer right now, when they can have it and when they can get it, rather than in a situation when we are forced to choose between health services or education services or drugs, and not be able to give them that offer.

That was a dose of reality, it was recognition of a very difficult world situation right now, and it was an opportunity, I think, to be frank and open and honest with the people of the Province.

Okay.  Let's have a little dose of reality.

It's not like the 21% comes in the first year of any deal, even if signed tomorrow, retroactive to the first of April.

Only 8% is retroactive.

So if all the public sector unions signed a deal today, the only thing they would be guaranteed getting is 8% more this year.

After all, by the Premier's own words:

the statement that I made very clearly said that if oil stays at the price that it is today we would have no choice than to not offer that same wage package under those circumstances because we would be facing multiple deficits of several hundred million dollars every year starting next year.

The awkward grammar of that sentence notwithstanding, it's pretty clear the Premier is saying that after this year there is no guarantee of anything since large public sector deficits would mean the provincial government wouldn't be able to honour wage increases of the kind being offered today when it supposedly has the cash.

But does it have the cash this year even though the Premier put it this way in the legislature:

We will have a good year this year. I indicated yesterday, just outside this House, that we will, in fact, exceed our surplus this year, even if the price of oil is at $50.

The answer is yes, but they will do it by running a deficit and borrowing hundreds of millions of dollars, just as the budget planned to do all along. Incidentally, at US$50 a barrel the provincial deficit would likely be more than $478 million this year.

The problem next year is that the budget deficit next would be even larger than the one likely in this year if you assumed oil at .

Remember that when the Premier talks surplus he's talking accrual accounting.  You have to subtract $360 million in imaginary money to get a sense of the real number.  What we are using here is the budget as presented in the House, which uses a modified cash basis of accounting.

Let's hold all things as they are in the current budget.  Now that's a bit artificial since even this year mineral revenues are dropping and just about every category of revenue should be taking a dip in the second half of the year.  What with the Premier threatening possible wage freezes, cuts or rollbacks or anything but the happy increases promised before, he's likely sending a huge chill across consumer confidence.  So it's artificial but let's focus on oil to illustrate the scope of the government's problem.

Given:

1.  Price = US$50 per barrel.

2.  Exchange rate = 25%.  That's actually higher than the rate I used before.

3.  Annual oil production = 105 million barrels

Therefore:

4.    Provincial oil royalty = $1.115 billion.

That's $600 million less than this year's starting point in the budget and, as you are now tired of hearing, the original budget projected a cash shortfall of $414 million plus an additional round of "off book" borrowing of $380 million.

Does anybody really think the provincial government could offer any wage increases with a deficit of $1.3 billion? 

Of course not.

Plus they know the Premier's wages versus social programs dichotomy is entirely false since the largest chunk of program spending is wages. 

All the Premier has succeeded in doing the past couple of days is further eroding public confidence in the local economy and the provincial government's ability to ride out the financial crisis the Premier likes to talk about to claim. 

Well, that is talk about when he doesn't want to forecast doom in order to frighten people as part of his brilliant negotiating strategy.

What we end up with isn't a dose of reality.

We just get someone shaking the magic eight ball again.

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Rio Tinto to release results of OPEX/CAPEX review earlier than planned

In the wake of the end of talks by BHP to take over Rio Tinto, the latter is reviewing the books to reassure the marketplace despite the company's $42 billion debt load.

The capital expenditure (capex) and operating expenditure (opex) reviews were slated for release in February 2009, but it now appears Rio will release the results earlier.

In the wake of the BHP pull-out, BHP's stock has risen while Rio has dropped about 34% in value.

Rio Tinto owns a 59% interest in the Ironore Company of Canada (IOCC).

Now word thus far on what if any impact the Rio capex review will have on IOCC's planned three phase expansion at its western Labrador operations.

The expansion was recently cited by Memorial University economist Wade Locke as evidence supporting his projection that markets will recover relatively quickly and return to pre-collapse conditions based on "the fundamentals":

In historical terms, commodity prices are still strong, he explained, and there are positive signs everywhere. He singled out the confidence shown by the Iron Ore Company of Canada in Labrador West, where a major expansion is planned.

"That should tell you everything you need to know. That company believes the future is bright for them and they're increasing their capacity now to take advantage of an improving situation in the future," he said.

Locke made his comments last weekend. News of Rio's capex review came in mid October.  BHP withdrew its offer before Locke's comments appeared in The Telegram.

In early November, Locke hinted at an unidentified major development coming in Labrador.

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Three guys and a magic eight ball

The Premier's first scrum of the new House of Assembly session yielded a huge number of interesting points.  CBC has posted it for your viewing pleasure.

1. Back to the future.  There are echoes in this scrum of the infamous January 5 massacre in which the Premier unilaterally froze public sector wages in response to a largely overblown warning of imminent financial collapse. [Update:  "Premier vows public sector wage freeze". 05 January 2004.]

Most media outlets are going to focus on the possibility that government would abandoned its own wage hikes in the public sector if things got bad enough. CBC did already.  Ditto voice of the cabinet minister and NTV.

It's right there in front of your face and there is immediate news value in the conflict.  Remember what makes news?  Money, power and conflict for three and when you get into this sort of thing - a Premier warning public sector unions actively involved in collective bargaining that he might just yank back his own offer -  you bring together a nice package.  Hence this sort of quote is pure gold:

"You know if we get into several-hundred-million-dollar deficits, then that makes the whole question of collective bargaining a big issue," he said, answering reporters' questions after the first day of the fall session of the House of Assembly.

[Update:  This is not the first time the Premier has used a message about government finances to threaten unions.  He did it in late October with the nurses.  Meanwhile, go back and check the scrums and news reports when this massive wage hike was introduced or when the nurses asked for more cash.  How many times did the Premier and the finance minister talk about being able to handle the 20% wage hike they imposed?  Did they ever mention the possibility that they might not be able to manage it?]

2.  The Big Picture stuff is done.  That's almost a direct quote and no one should miss putting that fact together with the public sector bargaining threat noted above.  By Big Picture, the Premier clearly means revenue and spending projections for next year and looking out two to three years.  The only stuff left to do is the actual departmental allocations and the traveling farce called "consultations".

By Big Picture, you have to understand that all the numbers thrown around by the Premier aren't just ones he pulled out of his ear.  These are the numbers the provincial government is working with for its projections.

3.  What's the big thing about reading?  Danny Williams likes to mention that he is reading stuff, although he is never clear what he reads.  He said "books" in the scrum - economics books to be specific - and then switched to journal articles and magazines and anything else he could lay his hands on. 

Sarah Palin talked about reading too, at least until reporters started asking her what she read.  How long before someone actually asks the Prem for some specifics on what he reads?

4.  No coincidence at all.  Remember the comment here about the overwhelming similarity between Wade Locke comments and those of the Premier and his newly minted finance minister?  Apparently no coincidence at all since the Premier admitted that economists from the university are on the Hill consulting.

At some point, reporters will have to clarify Locke's relationship with the provincial government.

5.  "No one could foresee what was happening here."   No one foresaw the drop in oil prices according to the Premier. He is evidently not reading the right things. 

6.  PIRA.  That would be the PIRA Energy Group, a consulting firm to the international stars. Their prediction in July was that oil prices would drop, but remain above US$100 a barrel based on "strong medium-term oil market supply/demand fundamentals."

7.  Production.  Count how many times the Premier mentions oil production, the possibility of increased production over projections and the importance of oil production levels  - conservative estimates according to the Premier - to the government budget. 

We know the provincial government has built its entire financial plan on oil revenues.  It's a house of cards, as the current economic crisis shows.

The budget was based on anticipated oil production in 2008 of 120 million barrels. Statistics from the Canada-Newfoundland and Labrador Offshore Petroleum Board show that oil production this year has averaged 10.3 million barrels per month and is therefore on track to deliver total annual production in this fiscal year of 123.6 million barrels. 

The highest offshore oil production level was last year when it hit 134 million.  In order to get the higher production the Premier keeps talking about - and therefore equal last year's record  - there'd have to be about oil would have to average over 12 million barrels per month in the last six months of the year.

Next year, production is expected to fall by 15% and that would give 2009 annual production of about 105 million barrels.

Remember those numbers.  We'll use them again in a minute.

8.  There's a notional surplus... The provincial budget projection was for a $544 million surplus.  That's presumably on an accrual basis. The same figures turn up in the Dominion Bond Rating Service assessment. Here's the thing:  it includes $360 million in completely fictitious money from the 2005 federal transfer deal that has already been received and spent.

9.  and a cash deficit.  Every time someone says the province is on track to meet budget targets, people in the province should worry.  We've covered this dozens of times at Bond Papers because on a cash basis, budget targets means $794 million in new borrowing.

Based on the new numbers, we can revise our calculations from October slightly.

Over the first half of the year, let's assume oil averaged about $120 a barrel.  That's a figure the Premier has tossed out and it's a little higher than the $115 Wade Locke mentioned.  That gives about $1.26 billion in oil royalties in the first half of the year.

In the second half of the year,  we can safely assume oil at an average of CDN$72 (US$60 + 20% dollar premium) and CDN$87 (US$72.5 + 20% dollar premium) for the purposes of our calculations.  We can also anticipate that other revenue sources (taxation etc) are not going to outperform original projections by any great amount. If they were looking that good, the Premier wouldn't hesitate to use them to bolster public confidence.

On that basis, the provincial budget would come up - respectively  - $478 million and $320 million short.  Compared to the projected $794 million shortfall that's not a big amount.  Spending restraint and a little extra cash here and there could balance the books on a cash basis. 

Don't count on that, at least if the last two fiscal years are anything to go by. 

10.   Then there's next year.  If we hold the budget exactly as it is this year  - anticipated spending and revenue - and vary only oil, we can get a sense of how big a financial problem the provincial government has helped create.

Oil production is expected to come in at about 105 million barrels in 2009.  Peg oil pessimistically at CDN$72 (US$60 + 20% premium) a barrel and you get oil revenues about $500 million less than this year's estimate.

That projected $794 million deficit (cash basis) this year becomes $1.294 billion in the red next year.   Unlike previous years where the trend was positive and the budget figures were low-balled, odds are much higher that the low-balls turn out to be dead-on if not downright pollyannaish optimistic.

If AbitibiBowater closes its mill in Grand Falls-Windsor, and mineral prices fall off, that deficit number would get bigger not smaller. As well, the prospect that Rio Tinto might adjust its capital expenditure plans next year could reduce some anticipated activity in Labrador west.  All of that is just a local manifestation of the recession expected in the United States and Canada, our major trading partners.

Bottom line:  we aren't protected by some magic bubble. These are rough calculations, to be sure and the figures aren't readily available to allow a more accurate and detailed assessment.  At the same time, the people who do have that information aren't sharing the accurate assessments.  The Premier's scrum on Tuesday covered such wide territory that one could easily imagine the finance department is relying on three guys and a magic eight ball for its planning.

Thankfully that isn't the case, at least based on the well-earned reputation of the finance department officials for deadly accurate forecasting and sound budget management. That's pretty close to what PriceWaterHouseCoopers said in their financial assessment in late 2003.  Then again that was before the current crowd took over. Things haven't been quite as accurate or as clear since then.

Let's just pray that the future as suggested by the calculations here doesn't turn out to be as bad as it looks.  If the current political crowd took credit for the boom delivered by things beyond their control - like oil prices - they can hardly expect people to think that a major fiscal problem in government isn't also theirs to own.

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Government spending news roundup

1.  The Canadian Centre for Policy Alternatives predicts the federal budget deficit might hit $27 billion in 2009 and nearly double that the year after.

The report re-estimates the federal fiscal picture for four economic scenarios — each more pessimistic than the last — under existing tax and spending policies.

• The first scenario, in which the economy slows but avoids a recession, yields a deficit of $7 billion in 2009-10 and $5.4 billion in 2010-11.
• The second, involving a mild recession in 2009, yields deficits of $12.6 billion in 2009-10 and $20.5 billion in 2010-11.
• The third, involving a deeper recession, yields a deficit of $19 billion in 2009-10 and $31.3 billion in 2010-11.
• The fourth, involving a major recession and slower recovery, yields a deficit of $27.9 billion in 2009-10 and $46.8 billion in 2010-11.

2.  British Columbia will post a $450 million surplus this year, down from $1.0 billion projected at the start of the current fiscal year. That news in the latest budget update from finance minister Colin Hansen.

3.  Federal finance minister Jim Flaherty is planning to rush public works spending in the coming budget as a way of stimulating the economy.

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Reality, what a concept: the global economic crisis version.

Only a few short weeks ago, some were wringing their hands over the imminent peril of the perils of inflation.  This was despite the obvious signs of a looming market "correction".

How long before they notice the scope of the problem and the current deflationary pressures?

Meanwhile the state-approved economist had another go at prognosticating in the Telegram on Saturday.  Sadly, the story isn't on line. [Afternoon update:  Courtesy of The Western Star.]

On top of his prediction last month that the the provincial government surplus will be as large or larger this year and originally forecast (and that prediction after the global meltdown started mind you) he is now saying that the economy will recover from the current crisis.

Well, of course it will. A penetrating insight into the obvious is that.

Outside of a few anarchists, everyone knows it will. Even in the 1930s after the Great Depression, the economy rebounded, eventually.

The question is not whether it will turn around but what will it look like when it does recover.

Pretty much like it did before - think 2006 with oil running at 80 or 90 bucks a barrel - apparently, since all the "fundamentals" that led to high oil prices are still there we are told in the Telegram story.

Really?

Well, at least, according to the state's favourite economist.

Like the ridiculous credit situation in the United States that fueled demand to heights never seen before. 

Yep.

That will exist after the current mess is over. 

After all, it is one of the fundamental causes of the demand spiral.

Now one of the things to bear in mind through all this is that in 2004 or 2005 you wouldn't have found an economist on the planet seriously suggesting oil at US$90 a barrel let alone US$150.  Those predictions didn't emerge until oil hit close to 150 and even then Goldman was thought a bit loopy to be tossing around 200 bucks by the end of 2008.  These days not too many are willing to buy into the current Goldman idea of oil being over $100 again next year.

That's because economic forecasts have a distressing tendency to rethink the future in terms of the here and now. As oil prices climbed above first 40 and then 50 and then 70 dollars, you started to see more and more revised forecasts for oil staying that those prices into the future.  A few months or years earlier and none of them seriously projected 50 let alone the heights it reached.

Apparently, it is taking some people a while to realise the scope of the current problem.  It isn't limited to the financial services sector and the automobile sector in North America, as if it was merely a couple of companies.  There is a broadly-based - fundamental - problem and as such it will have an impact both in time and across all sectors of the economy.  [Aside:  some analysts provide a refreshingly sober view of things, as in this video from CBC Here and Now.] 

You'd be silly to think we don't have a problem right now, but you'd be equally silly to think that a correction of this magnitude isn't going to alter some of the conditions that existed beforehand and which led to the current mess.  Fundamentally altering the fundamentals will likely produces a very different situation, and that likely doesn't mean one that will see oil shooting up to US$100 a barrel any time soon.  To be sure, let's make it plain that it isn't likely to occur again for a couple decades, much like the last time this sort of pattern  - high climb and then sudden price collapse - emerged.

Some companies will continue expansion plans.  This will especially apply to companies that are well managed or that secured their funding for expansion before the string of bank crashes.  Think IOCC in western Labrador.

That's proof of a well managed company, not any sign that the company believes in historically high prices for iron ore on into the future.  Rather the company management likely knows that by lowering costs whenever it can, the company is more likely to thrive even in lean times. That's how oil companies do it.

Smart business managers don't budget on the basis of historically  - and in some instances absurdly - high prices continuing forever just because they happened a couple of times.

Governments shouldn't do it either.

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Hebron negotiations secret video footage

Vote early! Vote Bond!

The first round of voting for the Canadian Blog Awards is underway!

Click on the big picture of Sir Robert and you'll go straight to the main page. Bond Papers is nominated under Best Blog and Best Political Blog.

You can also click this massive banner right here and wind up in the same spot.

Remember, it's only one vote per category so vote early, vote wisely and harass your friends to vote as well.

The are some great blogs to vote for, including Craig Welsh's Townie Bastard.  Craig has blazed trails in the Great North and his blog is a fine example of his considerable writing talent.

Wally Maclean's labradore is also worth your vote consideration.  He's had a huge impact locally.  Sometimes it seems his blog doesn't get the attention it deserves directly but you'd be surprised at the number of places his stuff shows up.  That's because it is solidly researched.  If you want a fact or want something straightened, check labradore.

Take your time, though and go through the categories.  You can also find links to each blog on the bottom of each category page if you need some time to make up your mind.

Just get out there and vote and to all those who vote Bond, thanks so much for your support.

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We are not alone!

No.

Not aliens.

Who needs to be an independent country when you can have a rubbish government fiscal policy just like the big boys?

All of this should sound very familiar;  only the amounts vary.

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The Gospel according to Chip Diller

Newfoundland and Labrador is usually one of the last places to catch a trend.  Doesn't matter if you are talking fashion or, in the latest version, government economic and fiscal policy, it seems to take a while for things to catch on here.

Late on Friday afternoon newly minted finance minister Jerome Kennedy issued a news release trumpeting a credit rating by Standard and Poor's as proof of the provincial government's "fiscal prudence and sound policies". 

Well, maybe catch up is the better word.

There isn't a government left in the developed world that is still pushing the sound fundamentals media line now almost two months after the start of the current global economic crisis.  No government is claiming some sort of credit for being able to weather a storm that, in many minds, is far from over.

Well, no government except the one here.

If you want to understand why everyone else's tune has changed, take a look at the five year trending in crude oil prices. You can find an example in the WTI futures box on the right hand column.  Click on the "5Y" symbol. 

Four years to get up to US$147 a barrel and a mere four months to tumble below US$50.  The steepest declines have come in just the past two months.

The speed of the price collapse should be a clue to analysts that the assumptions used before July to predict that oil would remain at unprecedentedly high prices for the rest of time were faulty.  The security premium, supply concerns and overheated speculation drove prices to the peak last summer but in addition to all that the superheating of the global economy, fueled by loose American regulations pushed things beyond anything that would be considered normal and rational.

In other words, the price of oil has been artificially high for a very long time. Given that markets have a way of correcting themselves at some point, it was really only a matter of time before a correction - a downturn - took the heat out of things.  The only thing that couldn't be foreseen, and that's about the only thing, was how steep a correction was coming and how it might last, but come it would as surely as it has come at every juncture in the past.

Fewer and fewer analysts are holding to the old projections, some of them dating back several months. Some of the more influential sources, such as the International Energy Agency, are forecasting high prices.  However, many are revising their short term projections markedly downward.  Deutsche Bank, among others, is projecting crude at US$40 per barrel by April 2009.  One analyst  - Robin Batchelor - who in May 2008 predicted high oil prices well into the future is now likening the current climate to one 30 years ago:

"On the upside it always overshoots and the same is true on the downside. What I’m looking at is the commodity supply and demand equation; long term there are still supply issues but on the demand side we’re facing downdraft," he points out. "The last time we had a fall of that magnitude was in 1979/80/81."

While Batchelor for one has not abandoned his high price forecasts, he has certainly altered his view dramatically. The reason is simple.  While he and others once assumed ever increasing demand, the current correction may alter the demand side of the price equation that can't be seen right at the moment. If the current downturn lasts well into 2009, as most expect, the IEA, among others, will likely go back and rethink their projections just as they revised their assumptions three years ago when they thought US$50 a barrel was the peak.

Closer to home, though, the hope in the old assumptions remain strong close to home. This week, economist Wade Locke told Memorial University's student newspaper The Muse that:

“The longterm [sic] price forecast is still in the $80- to $90-range for oil and that will not affect Hebron, White Rose Extension, or Hibernia South. Even if [oil] prices were to stay around $60, these projects would likely proceed,” he said.

Locke's comments are a useful segue to an interesting aspect of the local view from the provincial government and its supporters.  Locke certainly falls into that category and the similarity between his comments and those of the finance minister are striking.  With that quote from The Muse in mind, take a look at this one from the release on the credit rating:

"Our economy remains strong and the current economic downturn should not affect development of new oilfields including White Rose Expansion, Hibernia South and Hebron," said Minister Kennedy.

The phrasing is similar, much like the similarity in early October between Locke's and the Premier's references within days of each other to the government being able to meet and exceed its current budget targets even if oil falls to $10 a barrel.

But what's more interesting in these two comments is that neither is completely true and in the wider context of Locke's comments on a bright future based on oil wealth, they constitute a fixation on oil as the source of economic salvation not seen in this province since "1979/80/81."

Let's deal with the projects first.

The White Rose expansion is a relatively modest project.  With its development costs already recovered, oil would almost have to hit prices lower than the historic 1992 price of  US$8  per barrel to make it economically dodgy.

The Hibernia South extension is also not a pricey project measured in terms of the original Hibernia project or Hebron.  However, there is no development application yet and a decision to proceed would certainly be affected by oil prices significantly lower than the current ones.

In all likelihood, the project will go ahead given that the oil companies have at their doorstep a provincial government willing to invest hundreds of millions of very scarce tax dollars in the expansion since that ultimately lowers their cost.  Given they will have recovered their initial costs by the time the new fields come online, their profit position would improve immensely in such a scenario while it would be the junior partner who would see a relatively lower return on investment. Low oil prices - especially below the foolish fixed price trigger of the current government's oil super-royalty regime  - won't affect them as much as it would the new kid in the oil patch.

Hebron is the most costly of three projects and the one most likely to be affected by a long period of low prices. Analysts seem to agree that the current price climate makes investment in high cost ventures like offshore heavy oil, deep water projects and oils sands less attractive.  Hebron's reported financial tipping point  - US$35 per barrel - is well below that of an oil sands project but stop and look at current prices.

There's a reason why the companies insisted on a clause in the Hebron agreement which gave the partners  - and the partners alone - the right to take up to a decade to sanction the project.  Current Hebron timelines are merely works in progress, subject to revision is the financial climate changes.

The upside for Hebron is that the companies managed to secure several significant concessions from the provincial government as hedges against a drop in oil prices. Those concessions make it more likely the project will proceed.

First, they secured the decade to sanction with no penalty for deciding against proceeding. They have time to decide and there is no real cost for delaying if the numbers don't add up.

Second, they won the royalty concession that dropped the pre-payout royalty to a fixed 1% as opposed to the escalating scale of the old royalty regime.  The energy minister herself heralded this as a major feature of the new deal.

Third, they were able to tie the super-royalty to a fixed price below which no extra cash was paid to the provincial treasury.  By the government's own estimate, oil prices averaging US$50 a barrel over the life of the project produced less than half the royalties of a high oil price.  Drop below that magic fixed trigger and the provincial share drops accordingly on top of the front-end royalty concession but from the company standpoint they can guarantee low possible costs across the board.

Fourthly, they secured significant fabrication concessions in the agreement.  Most of the topsides work will be done outside the province anyway based on what appears to be a huge miscalculation by the provincial government's negotiating team. 

On top of that, however, the management arrangement  - including the provincial government as junior partner  - would enable the companies to ship virtually all the topsides work and associated engineering outside the province in order to lower the costs and complete the project on time. If oil prices stayed low enough long enough and construction costs stayed high enough, it may well be worth the companies' while to pay the modest penalties for changes in the work commitments to get the deal done, even if they had to pay the penalties at all.  A renegotiated contract arrangement with the provincial government's energy company and the government that changed the work commitments would likely never be made public under the revisions to the energy corporation act passed last spring.

The companies may well get their projects, but the return to the provincial treasury and the overall impact on the local economy may turn out to be far smaller than originally promised.

The fundamental problem in all this is the fixation on oil projects which has led the provincial government and its supporters to tie government finances to the price of a barrel of oil.  Despite all assurances to the contrary, the next several years may be see provincial government fiscal problems as unprecedented as the surpluses of the past two or three years. Unlike those surpluses, however, the problems won't be figments of an accountant's bookkeeping methods.

Beyond that, prosperity for the province as a whole, in Locke's view, appears to be driven entirely by a couple of oil projects which, it must be noted, have a fixed life span.  Neither Locke nor Kennedy - who echoed Locke's definition of prosperity - have not realized the folly of resting everything on the a very slippery commodity.  

Oddly enough, it fell to Donna Stone, president of the St. John's Board of Trade to sound a very small warning bell against this very situation.  Board of trade presidents are not known to buck the government line so her words stand out.  As Stone told the Rotary Club of St. John's:

“This still gives us some cause for concern, however. Given the volatility of oil prices, the province should look at a long-term plan that will diversify our economy and make us less dependent on this ever-changing commodity,” Stone said.

Stone is absolutely right.  Almost 20 years ago, the provincial government realized exactly that and implemented a broadly-based strategic economic plan to hedge against such dependence.  That plan has been tossed aside in the  past four years.

The consequences may prove to be dire and no amount of assurance that all is well will save us from the them.

Just remember what happened to Chip Diller.

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Hebron timelines according to proponents

Based on the Telegram story Thursday by the always rock solid Moira Baird:

1. Development application submitted no later than December 2009. Obviously the project sanctioning decision will come before that based on the final project design and economic analysis.

2. Construction to commence 2012. That is pretty much in keeping with the timelines projected in August when the provincial government announced the final agreement.

3. First oil: 2017. Again that's pretty much on the timelines forecast already informally which had first oil somewhere around 2018.

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How low?

West Texas Intermediate (WTI) crude for December delivery fell below US$50 in trading on the New York Mercantile Exchange Thursday on projections of continued lower demand. WTI fell as low as US$48.24 in trading, but at 1630 hours Eastern, Bloomberg was showing the price as US$49.00.

December contracts closed today, shifting attention to January delivery.  WTI for January fell to US$49.42.

WTI is the benchmark  price quoted in media reports even though 80% of the world's light sweet crude  - including the Newfoundland and Labrador offshore  - is traded based on pricing of North Sea Brent. 

Brent for January fell to US$48.08 on Thursday.

Many are wondering where the bottom will be for crude prices.  WTI has been above US$50 since September 2004 and it is likely that sustained period that led many analysts to forecast - and to continue to forecast - high oil prices into next year.  Associated Press reported Thursday that Goldman, the analysts who had earlier said oil would hit US$200 a barrel by year end, have stopped oil trading recommendations.  The company is sticking by its forecast that oil will rebound to US$107 by the end of 2009.

Those sorts of analyses are getting harder to find, however.  As Bloomberg reported:

Prices may fall as low as $40 a barrel by April, Deutsche Bank AG said in a report yesterday. The Organization of Petroleum Exporting Countries potentially needs to cut production by 2.5 million barrels a day to reduce output in an oversupplied market, the note said.

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Alberta commission recommends banking oil cash

A commission struck to advise on how the Alberta government should handle its oil revenues is recommending the provincial government devote more to the Heritage Savings Trust Fund.

The Alberta Financial Investment Planning and Advisory Commission said in its report that Alberta needs to boost the size of the fund to $100-billion by 2030, compared to just $15.8-billion now.

Bear in mind that Alberta can bank extra cash since it has already eliminated the provincial government's accumulated debt load.  It also salted some of its revenues in the Heritage Fund.

Meanwhile, the current provincial administration has opted to spend all its oil revenue and specifically rejected the idea of an savings or investment fund or indeed of actually reducing the provincial government's debt burden.

The argument about devoting some oil revenue to savings and investments is compelling:

“To preserve today's prosperity and pass on the benefits to current and future generations of Albertans, we urge [the government] to make savings the new fiscal anchor for Alberta,” the commission said.

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Aluminumania!

Oh yes, there'll be a smelter for sure in Labrador.

Aluminum prices hit a three year low.

Perfect time for a company to hit up a willing government for some Valdmania cash.

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Paying for work

The provincial government's business department is tossing $325,000 at an international, private sector information technology company so the company can create 10 new jobs over the next five years.

$325 K

10 jobs

Five years.

Do the math.

That's 32,500 per job, or $6,500 for each position for each of the five years.

That's pretty much on par with the current administration's plan to develop new jobs in the province by subsidizing with public sector cash.

Within the past two weeks, the provincial government did the same thing with more public cash for a private sector manufacturing business and its facility on the Burin Peninsula:  $500 K for an extra 30 jobs and that's on top of the subsidies to get the workforce to its current level.

This use of public cash  - including low cost power - for the private sector mirrors what was done here in the 1950s and 1960s in the disastrous Smallwood industrial development program. 

It's an idea that was rejected in the 1992 Strategic Economic Plan.  There's good reason for it. Subsidizing private sector businesses like this doesn't have the greatest record of success, at least when it comes to creating sustainable, competitive industries.

No small irony that the money for a software company  - singled out by the auditor general - comes days after another software developer that relied heavily on public sector cash closed its doors.

Another recipient of provincial cash imploded just months after getting the cheque.

Major national cable and telecom companies aren't likely to fold, but they sure loved getting a massive cash injection from the provincial government to subsidize their expansion projects.  The total cost of that one hasn't been calculated yet.

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NL crude hits $51

Brent crude for January delivery hit US$51.84 in trading on London's commodity exchange Tuesday, the lowest settlement since January 2007.

Brent is the benchmark price for Newfoundland and Labrador light sweet crude.  Such a low close for January crude, and even allowing for a 20% currency premium - virtually guarantees that crude prices in the second half of the current fiscal year will average well below the government's assumed average of US$87 a barrel for the entire year.

In Alberta, the provincial treasurer today announced his province would lose $6.5 billion in revenue this year due to the economic downturn and lower oil and gas prices.  The 2008 Alberta budget assumed an average price for crude of $78 per barrel.

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Government packs board of regents with political cronies

In a late afternoon news release, the provincial government moved to increase its political control of the Memorial University board of regents.

Bob Simmonds - Jerome Kennedy's former law partner - is the new chair. Three of the remaining five appointments, like the new chair,  all have strong ties to the ruling Provincial Conservatives.  The last is the wife of the late principal of Grenfell College and therefore a supporter of the government's costly "autonomy" scheme. 

These moves will ensure that cabinet's will is imposed the university.

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Where the NL MPs sit - the despun version

At left is a seating plan for the opposition benches in the current session of the House of Commons. 

The seating chart is laid out from the perspective of the speaker, who would be positioned at the bottom edge.  These seats are to his right.

As the largest opposition party, the Liberals sit closest to the speaker's chair.  Next come the Bloc Quebecois and at the top of this picture - farthest away from the speaker - are the New Democrats.

The orange coloured squares show the members of parliament from Newfoundland and Labrador.

1.  The Liberals are seated from front benches to rear in order of precedence, that is in the order they were elected.  Thus, Gerry Byrne sits in the second row from the front (second column from the right in the picture).  Todd Russell and Scott Simms come next and in the back are the three newbies, Judy Foote, Siobhan Coady and Scott Andrews.

2.  That lone seat way down the back, right next to the door and almost the farthest away from the speaker of any seat in the Commons is Jack Harris.  He may be in the front bench but, since the parties have largely done away with the old practice of seating shadow cabinet people on the front benches, Jack has a seat that means something only within the New Democrat caucus.

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The bits they didn't say

A youth conference discussing ways of keeping young people in the province.

A speech by the Premier, including the comment:

"It is by making sound choices in the coming years, both individually and as one team, that we will be able to remove the word 'outmigration' from our vocabularies in the same way that we removed the word 'have-not,' " Williams said during a speech.

That quote from a CBC news story includes comments from two participants, one of whom uses very familiar phrases:

"I don't think it needs to be Alberta wages," Snow said. "I'm not looking for Alberta. I love Newfoundland and Labrador and I love St. Anthony. I just want to stay — Newfoundland is home."

The old homing pigeon drive.

or these comments from the voice of the cabinet minister version:

Twenty year old St. Anthony native Kara Snow says Newfoundland and Labrador is a proud strong determined province and the people here have a lot of things to show that.

Jonathan Earle from Red Bay, Labrador says he thinks the Youth Retention and Attraction Strategy is a step in the right direction.

Proud. Strong. Determined.

Nothing like a political party slogan or, for that matter, a fellow attending the conference.

And Kara and Jonathan are, evidently just two young people attending this conference, they being typical of young people across Newfoundland and Labrador who are, quite naturally interested in these things on a go forward basis.

Typical they might be but they do have a couple of features that make them stand out, features left out of the news stories.

Like the fact that the conference or summit was by invitation only, meaning that those in attendance were selected by the provincial government and its hired consultant.  Not so much a gathering of people driven by their own interests as much as a carefully selected group.  Carefully selected according to some unknown criteria;  perhaps their ability to spout talking points or their enthusiasm for the official views.

Certainly it is not for new ideas since the original news release and the stuff just recently speaks of discovering what young people are prepared to give up.  Government is apparently less interested in creating an environment that promotes excellence and accomplishment and more one based on "an understanding of the trade-offs and choices young people are prepared to make."

The homing pigeon policy. 

We can solve outmigration, to go back to the Premier's speech, not by innovation and creativity but by figuring out how little people are prepared to settle for. Or in Kara's construction, people should expect to make less money since she does not want "Alberta", she wants something else, called Newfoundland and Labrador.

How edifying a notion.

How far the opposite of "have" could one get when by the very words they use the Premier and the people at his conference accept notions that limit everyone to accepting less than might be attained elsewhere.

This is fundamentally the opposite of the approach set by government, based on genuine consultation, in the years when most of these young people were toddlers, in diapers or not even thought of.  The 1992 strategic economic plan - Change and challenge - set as its vision "an enterprising, educated , distinctive and prosperous people working together to create a competitive economy based on innovation, creativity, productivity and quality." 

There was no need to ask young people what it would take to get them to stay here.  For the most part, people leave because elsewhere offers greater personal and financial opportunities.  The solution to ending outmigration lay in creating a province in which wealth - genuine "have" status - could be found at home.  Creating wealth - the synonym is "prosperity"  - came from unleashing talent and creativity, of daring against the best in the world. 

In 1992, staying in Newfoundland and Labrador did not have to mean compromise.  In 2008, compromising, settling, accepting less is the stated foundation of government strategy.  In 1992, compromise was rejected;  in 2008, it is embraced.

But then there is the other bit about Kara and Jonathan and likely a bunch of others at the session.  These are not just any young people but part of the group selected already by the provincial government to work with the consultants:

A Youth Advisory Panel will provide ongoing advice on the project’s research design and the development of materials such as dialogue workbooks.

This project seems less about research, of finding out what people want and more about confirming a pre-determined set of ideas, of guiding people along a path.

Certainly, if the familiar phrases used by the conference organizers and presented as ostensibly unvarnished opinion is any guide, the strategy is working.

It's always the stuff they don't tell you that is more revealing.

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Offshore land parcels net $129.8 million

From the Canada-Newfoundland and Labrador Offshore Petroleum Board [format changed from original]:

The Canada-Newfoundland and Labrador Offshore Petroleum Board today announced the results of the 2008 Calls for Bids NL08-1 and NL08-2 for exploration rights in the Newfoundland and Labrador Offshore Area. Bidding closed on November 14, 2008 and successful bids were received on all five parcels offered totaling $129,892,000. Three of the successful bid parcels are located in the Central Ridge/Flemish Pass and two are located in the Jeanne d’Arc Basin.

The bids represent the expenditures which the bidders commit to make in exploring the parcels during the initial five-year period of a nine-year term Exploration Licence. If companies discover significant quantities of petroleum resources as a result of the exploration work, they may then seek a Significant Discovery Licence from the C-NLOPB. Any Significant Discovery Licences issued in respect of lands resulting from these Exploration Licences will be subject to rentals which will escalate over time.

The following bids have been accepted:

NL08-1 Flemish Pass:

• Parcel 1 (138,200 ha)  -  Husky Oil Operations Limited 40%, Petro-Canada 40%, Repsol Exploracion S.A. 20%:  $18,600,000
• Parcel 2 (134, 227 ha) - Husky Oil Operations Limited 67%, Repsol Exploracion S.A. 33%:  $1,188,000
• Parcel 3 (55,954 ha) - StatoilHydro Canada Ltd. 65%, Husky Oil Operations Limited 35%:  $18,724,000

No. NL08-2 Jeanne d’Arc:

• Parcel 1 (19,430 ha) - Petro-Canada 50%, StatoilHydro Canada Ltd. 50%: $81,900,000
• Parcel 2 (121,348 ha)  - Husky Oil Operations Limited 67%,  Repsol Exploracion, S.A. 33%: $9,480,000

 

Subject to the bidders satisfying the requirements specified in the Call for Bids and Ministerial approval, the Board will issue an Exploration Licence for each of the five parcels in January 2009. The licences will be for a term of nine years, with an initial period of five years.

Media contact: Sean Kelly APR, Manager, Public Relations (709)778-1418//(709)689-0713// skelly@cnlopb.nl.ca

 

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Signs of the times

1.  Consilient Technology, a success story in the local information technology sector closed its doors today. The office is closed and the furniture is gone, according to CBC news.

In his report for 2006, issued early in 2008, Auditor General John Noseworthy raised concerns about the conditions attached to an infusion of provincial public money.

2.  Wabush Mines is slashing production in response to the global economic downturn.  Production forecast for 2009 is about half of what it was in 2007/2008.  Layoffs are expected.

Other factors are influencing the Wabush Mines decision in addition to the demand drop:

"We are now going through the most difficult time in the history of Wabush Mines, with, from what I perceive to be, an unfavourable work climate at the plants, the worst cost structure in North America and a plant that is aged," he said.

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