Scotia Capital: definitely read the fine print

Anyone who reads Scotia Capital’s summary on the recent Newfoundland and Labrador budget would be well advised to read the disclaimer on the bottom of the first page:

While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.

So there you have it.  We are giving you this information but we don’t stand behind it, verify it or anything else it other than copy it onto a page.

Big Red Flag Number One should come when you see a chart that shows the provincial net debt at little more than $4.0 billion.  Note the asterisk indicating that this chart – prepared by the bank people – excludes unfunded pension and similar liabilities.

This chart enables the bank to make this forecast right up at the top of page one in a lovely box to get your attention:

With its sharply reduced debt burden, including its unfunded pension liabilities, its infrastructure replenishment and its tax relief, the Province is now better positioned to undertake the first stage of the major Lower Churchill hydro-electricity project.

Massive problem:  the net debt is not a shade above $4.0 billion with great revenue streams as mapped out in the rest of this document.

It is, in fact, that $4.0 billion ish number with another $5.2 billion.  The official government documents contain the accurate information. If you look at the total gross debt, it’s somewhere above $10 billion.

Not surprising that the bank will put a disclaimer in there:  when you present misleading information on page one and bury the information on page three, it’s a good idea to disown it somewhere.

What’s worse, the bank also buries another hint of other problems related to the Lower Churchill on page three of its budget summary:

…following less-than-expected cash outlays by the Province for capital assets in FY11 (sic) …

That would be a well established pattern of booking capital projects and then having problems getting them done without massive delays and gigantic cost over-runs.

Then there’s this little gem:  forecast deficits of almost $800 million dollars each over two years are not the result of overspending or any other sort of fiscal imprudence.

Nope.

The bank states that the cause of these chunky deficits “is a forecast net revenue decline of almost 6% in FY13, primarily reflecting the loss of the Atlantic Accord 1985 payments after the $536 million transfer in FY12.”

A provincial government that is bringing in oil revenues that would stagger a team of Alberta-sized oxen can’t balance its books because a limited set of federal hand-outs that were known to be limited have finally run out.

In other words, the provincial government plans to spend almost a billion more than it knows it will bring it but that is not their fault or any sign of dubious financial management.

You have got to be frickin’ kidding, Bank of Nova Scotia economist types.

They aren’t done yet, those bank analysts. 

Apparently, Muskrat Falls will be

a major source of new export revenues and a key factor facilitating Labrador’s development, but the undertaking is still ambitious, placing a high premium on the Province’s fiscal flexibility.

This sort of comment is nothing beyond government-sourced spin and sheer crap. The project cannot be a source of new export revenues given that the Premier has already publicly acknowledged the government intends to sell any export power it does manage to flog at a price below production costs.

And it’s not like any of this information is not already in the public domain, but obviously when anyone reads a Scotiabank economic assessment of anything, they might want to check for disclaimers and pay close attention to them.  If the Newfoundland and Labrador budget analysis commentary is anything to judge by, these guys have no idea what is going on beyond what they read in a government news release.

- srbp -

Demographics, economics increase pressure on temperamental Williams and volatile policies

There are, however, some urgent domestic priorities -— the necessities of life, the outmigration of our youth, unity, mismanagement and economic diversification.

Danny Williams, Progressive Conservative leadership victory speech, April 7, 2001

That was then.

Recent data from Statistics Canada show an interesting trend now.

Table A (left), shows population figures for Newfoundland and Labrador from 2001 to the present in half year time periods. Note that there has been a general decline over the entire period but that the rate of decline increases after January 2005.

This likely reflects the series of economic setbacks in the fishery (FPI in particular), Stephenville, and the failure of Hebron on top of the outflow of individuals that otherwise occurs.

There is generally a flow into and out of the province each year. The figures presented in Table A reflect the net result of inflow and outflow.

Table B (above) shows the annual rate of population change for Newfoundland and Labrador from 1952 to the present.

Green represents growth and red represents a decline in population. The largest decline is in periods after the cod moratorium.

When Danny Williams took office, the rate of population decline was on par with declines in the mid-1980s.

The rate for the first half of 2006 is the same as that experienced in the mid-1990s and in 2002.

New Approach needed

One of the overriding implications of the outmigration trends is that Danny Williams pseudo-nationalist posturing will do medium- and long-term damage to Newfoundland and Labrador.

Not only is the overall population declining, but, as forecast since the early 1990s, the population remaining will become increasingly dominated by retirees and children. The shrinking productive portion of the population means that the economy must become more productive. It also means the provincial government must have increased revenues or - at the very least - more stable sources of income.

The longer the Williams administration holds up reform of the fishery, particularly Fishery Products International, the more difficult it will be for the fishing industry to make the changes needed. Government has offered no ideas on dealing with the substantive economic problems at the heart of the current crisis; its focus on marketing is just the one aspect of the overalll issue government can without any consequence. Marketing looks good and the government doesn't risk anything politically. Unfortunately, leadership that lacks the willingness to make hard decisions is the opposite of what is needed.

In the oil and gas industry, a combination of developments are demonstrating the seriousness of the Premier's miscalculation on Hebron. Development of that field would have come at exactly the right time - if a deal had been cut last spring. Despite the Premier's claims that "talks" are going on behind the scenes, the project is definitely dead and likely will be dead as long as Williams persists in his unstable, volatile mode.

A major discovery in the Gulf of Mexico by Chevron and opening of additional acreage in the Gulf also place more attractive properties in play that have far less political risk for investors, if nothing else, than dealing with the temperamental Williams administration.

Norwegian energy giant Statoil - owned 70% by the Norwegian Crown - is looking to invest CDN$1.0 billion in the Alberta tarsands, not the Newfoundland and Labrador offshore. Meanwhile, declining natural gas prices in North America make it unlikely that any interest will follow the local gas resources even if the Williams administration manages to issue a gas royalty regime by the end of the year as originally promised.

Bear in mind that Williams has sat on the regime for three years,largely ignoring it in the one-thing-after-another tedious and needless approach this government has adopted for major policy issues. As well, Williams posturing on oil and revenues suggest that Williams' gas regime would not be structured to provide competitive incentives to attract greater investment. To do otherwise would involve political risk and Williams has shown himself to fear any threat to his image.

Newfoundland and Labrador is not alone in facing dramatic demographic shifts. A group of Quebec academics and former politicians released a manifesto in 2005 that drew attention to several factors that will affect Quebec's economic and political future. One is demographic change.

While other provinces are already well on the way to addressing the impact of issues like population decline, the Williams administration seems unable to develop policies. Its approach across the board is to spout inappropriate ideas based on attitudes from the murky past.

A new approach is needed.

The only question for Newfoundlanders and Labradorians is whether the Williams administration can fundamentally change and start to deliver on its promised New Approach.

(h/t to the Dominions' finest statistician.)

Paging Dr. Freud #nlpoli

Moya Greene, head of the Premier’s Economic Recovery Team, told municipal leaders last week that the provincial government spends almost $2.0 billion less on health care than it actually does.

Weird.

She said the government spent 25% of its budget on health care.  VOCM reported it: “Greene says healthcare is about 25 per cent of the province’s total expenditures, and that it is a conversation we have to have.”

The actual share in 2019 was 42% and the forecast share in 2020 in 37%. You can find the figures in the budget tabled in the House of Assembly at the end of September.

This is a really bizarro comment since Greene is already well into her job of sorting out both government overspending and re-organizing the economy.  She should have a handle on all numbers. 

After all, Greene and her provincial recovery team will deliver a preliminary report by the end of February. Sure she’s not due to have the whole thing finished until April, but the first deadline of February is really only about three months away, if you allow an interruption for Christmas.

But that’s not the only weirdness.

Spending the future

" [The change in the province's financial outlook] That's very dramatic...Some people are going to stand back and say 'Oh yeah, that's just because your very lucky. That's because the oil prices have gone up.' Well, no. That's part of it. But we had a tough budget, a prudent budget. We've managed the province, fiscally, very tightly."

Premier Danny Williams
Quoted in "Cash boon may fund province's infrastructure"
by Rob Antle, The Telegram, 22 October 2005, p. A3

Premier Danny Williams is absolutely correct.

The provincial government's financial state is a direct result of oil and gas revenues. High oil prices have produced a boost beyond what the Real Atlantic Accord, the offshore royalty regimes and development at Voisey's Bay would have produced anyway.

Unfortunately, the premier's positive comments may have two unwelcome results. First it may make it seem as though the province can afford to increase spending in a number of ways. Second, his comments divert attention away from the fundamental failure of the Williams administration, two years into its mandate, to produce integrated plans to address the province's financial windfalls in a way that will yield the greatest long term benefit.

Let us deal first with the overall financial situation.

The Premier stated that the "consolidated deficit [this year] could be down in the range $100 [million], $200 [million] range" from the $492 million accrual deficit forecast in March. The Premier proposed to spend at least some of this money on infrastructure, especially in rural Newfoundland and Labrador.

Let us be clear: the $492 million shortfall forecast in March 2005, indeed all the accrual deficits forecast by the provincial government, include significant components that are made up of several unfunded liabilities.

The Premier's comments come from adding into his calculations the huge amount of money coming from the offshore. This year it is reputedly in the range of $400 million beyond what was projected. The provincial government's own figures, used by economist Wade Locke, showed that the province's offshore revenues would be $600 million this year. This was based on oil at about US$15 per barrel lower than current market prices.

His comments about the improved financial situation are also based on growth in the province's economy (gross domestic product or GDP), as well as changes to the structure of the debt that themselves reflect long term efforts by successive administrations since 1989.

On the face of it, the debt to gross-domestic-product [GDP] ratio seems greatly improved. In 1991, for example, the province's total debt was 65% of the provincial GDP. Its accrual debt was approaching 100% of GDP.

In Fiscal Year 2004, by contrast, the total debt was 44% and its accrual debt was about 50% of GDP. This change was entirely due to growth in the provincial economy. Little if any debt was retired in the intervening 13 years; in fact the provincial government and its agencies owed more money in 2004 than in 1991.

One substantive positive change, however was the reduction of debt held in foreign currencies. In 1991, almost half the province's direct debt was held in expensive foreign currencies and much of the debt was held at high interest rates. This greatly increased the amount needed to service the debt, that is, to make the interest payments. By FY 2004, less than 22% of the debt was in foreign currencies and government continued to roll over its high interest debt in lower-rate loans. Such is the improvement that in 2004, the province was paying slightly less to service its debt than it was a decade earlier yet the total debt (not accrual) was actually $2.0 billion more and debt servicing accounted for 13% of total government expenditures compared to 15% in 1994. Looked at another way, in constant dollars, the provincial government is actually spending less on servicing its debt than it was in the early 1990s despite owing almost 40% more.

An increased debt load with what are admittedly transient increases in both the economy and provincial revenues do not make for a windfall. Nor does it support dramatic increases in program spending or capital works.

Consider as well that in his remarks to the Telegram editorial board, Premier Williams spoke of spending the supposed windfall on public infrastructure around the province, especially in rural Newfoundland and Labrador. In 2004, infrastructure cash was supposed to come from a new transfer payment from the Government of Canada designed to offset Equalization losses.

That deal, when it was finally signed, actually did not effectively double offshore revenues, as the Premier had originally sought. Instead, it added a single lump sum payment of $2.0 billion. That money sits collecting interest at a rate of about $5.0 million per month, with no publicly announced plans on what the government plans to do with either the $2.0 billion or any of the $60 million in interest coming from it.

Against this backdrop, one must look at the Premier's comments with some degree of concern. The provincial government still has no coherent plan for tackling the long-term financial issues identified by PriceWaterhouseCoopers. There is no commitment to paying off debt.

The "revitalization" of rural Newfoundland and Labrador, embodied in the Williams administration's Rural Secretariat is merely a slightly revamped version of the ruralist approach of the previous Grimes and Tobin governments. This was simply a collection of short-sighted efforts to avoid dealing with the substantive changes coming to much of Newfoundland Labrador as a result of changes in demographics and in the economy.

One of the last acts of the Wells administration, in December 1995, was to approve release of a discussion paper on a Strategic Social Plan [SSP] for Newfoundland and Labrador. While the incoming Tobin administration scrapped the planned release and ordered copies destroyed, some have survived. The introductory essay describes the looming changes in simple and compelling detail.

Beyond the outmigration resulting from the collapse of the cod fishery and the then-anticipated economic growth from oil and Voisey's Bay (see the conclusions of the 2002 provincial report linked above), rural Newfoundland and Labrador would change dramatically from what it had been. A chronically low birth rate would produce an internal migration from small coastal communities to larger centres. Changes in the fishery would reduce the number of workers there and, if allowed to take its natural course, the fishing industry would dramatically lower the number of people employed while increasing the earnings of those involved. Overall, the workforce would be smaller than the non-working population - the so-called dependent population - for the first time in many decades.

Newfoundland and Labrador is not alone in this respect. Quebec is in much the same situation, as the recent Quebec Lucide manifesto reveals.

At home, we have a curious mixture of action from the provincial government. On the one hand, the provincial government's raw materials sharing plan for the crab industry reflected yet another attempt to forestall changes that demographics and economics would otherwise produce in Newfoundland and Labrador. This echoed the actions of both Brian Tobin and Roger Grimes.

At the same time, Premier Williams comments to the Telegram echo the Strategic Economic Plan [SEP] and the real Strategic Social Plan of the Wells administration. His description of regional hubs and a focus on local strengths as a means of diversifying local economies around the province are lifted almost word for word from the SEP and comments by Clyde Wells.

What appears to be missing from the Williams administration is a clear-eyed vision of the province's challenges and of its solutions. Both the Wells SEP and SSP had such a vision, derived not from the Premier's Office or Clyde Wells' own predilections but from intensive discussion among the province's own people. That the development vision survives today as core economic development policies from the Williams' administration is testament to its fundamental strength.

Before the Premier starts spending any of the windfalls he has coming this year and over the next five years or so, he might want to actually produce an integrated economic and social plan. The many promises of plans contained in the last Throne Speech, indeed all the promises of plan that have been made since October 2003, do not add up to very much of anything at all.

The clock is indeed ticking and before we spend the future of the province and its people, the Premier and his administration might be well advised to climb up and tree, see what the future may bring and set the province on the course.

A little straight talk often times goes a long further than singing one's praises to earn both proper recognition for the good job done already and continued support for the journey ahead.

Spending the future (2005) #nlpoli

" [The change in the province's financial outlook] That's very dramatic...Some people are going to stand back and say 'Oh yeah, that's just because your very lucky. That's because the oil prices have gone up.' Well, no. That's part of it. But we had a tough budget, a prudent budget. We've managed the province, fiscally, very tightly."

Premier Danny Williams

Quoted in "Cash boon may fund province's infrastructure"

by Rob Antle, The Telegram, 22 October 2005, p. A3

Premier Danny Williams is absolutely correct.

The provincial government's financial state is a direct result of oil and gas revenues. High oil prices have produced a boost beyond what the Real Atlantic Accord, the offshore royalty regimes and development at Voisey's Bay would have produced anyway.

Unfortunately, the premier's positive comments may have two unwelcome results. First it may make it seem as though the province can afford to increase spending in a number of ways. Second, his comments divert attention away from the fundamental failure of the Williams administration, two years into its mandate, to produce integrated plans to address the province's financial windfalls in a way that will yield the greatest long term benefit.

Two solitudes #nlpoli

CBC and the Telegram  carried a story on Tuesday that the province would be hit by a “mild recession” next year. There’s not much real news in that since oil and minerals will all be down in price for the foreseeable future. Major projects are coming to an end.  All known.  All foreseen. But since the Conference Board of Canada issued the release and used the words “mild recession” and so that makes it news.

Later on Tuesday,  everyone carried the story that Premier-designate Dwight Ball had written to the federal government to try and forestall the two percent hike in the harmonised sales tax. Same thing:  news release, therefore news.

At the risk of repeating the same thing again, let’s just recall that the latest change in oil prices means that 36% of government spending this year will be covered by borrowing from the banks.

The sales tax hike won’t make much of a difference this year.  The  $50 million or so it will bring in between January and March will amount to precisely 1.6% of the revised borrowing. It was frig-all before oil dropped. It is even moreso frig-all now when compared to the magnitude of the provincial government’s financial problems.

We can say that revenues won’t be much better next year.  This is another point worth bearing in mind.  The local media have habitually followed slavishly behind the provincial government’s lead over the past decade and talked about last year, not the year coming up. and in truth.  Well, this whole HST thing is another example of chasing mice when the deer are just over the hill.

Global oil round-up

Some randomly selected articles from around the world on the current state of the oil industry.

1.  Omani oil revenues in the first four months of 2009 are down about 50% from the same time last year, according to Reuters.

2.  Expect a downward oil price correction shortly, according analysts quoted in the Edmonton Journal.   They put the drop to the low 60s or high 50s a barrel.  [Hint;  they’re conservative;  think lower still]  Among the factors cited:  weak demand, new production coming on stream and tons of oil currently in storage onshore and offshore that doesn’t have a market yet.

3.  Of course,the peak oil cultists are still predicting the opposite so they see any lowering as just a temporary calm before the Apocalypse hits.

4.  Scan to the bottom of this article on a recent meeting of  PetroCaribe and you’ll see reference to Cuban oil potential:

In the case of Cuba, Venezuela's financial and energy support is critical to supporting the Castro regime. Energy dependence has long been Cuba's Achilles' heel.

Havana used to depend on the east bloc for cut-rate oil, and plunged into economic chaos and blackouts when it was cut off after 1989. Now it depends on crude from ally Venezuela.

Cuba is negotiating oil exploration and production deals with Russia, China and Angola, with Moscow shaping up as the partner that could make the communist island energy self-sufficient, if its untapped offshore reserves pan out.

If it can achieve energy independence, Cuba may in the blink of an eye turn from a cash-strapped developing nation into a flush oil exporter, possibly projecting its current regime years into the future.

Cuban authorities in October announced that the Caribbean nation's crude reserves were more than double what had been thought, and now were estimated to be about 20 billion barrels.

5. OPEC oil production rose slightly in May, up again from a slight rise in April. Compliance with the OPEC production quota dropped again in May with Venezuela, Iran and Angola exceeding their quotas.  Go back to the article on PetroCaribe and you’ll see Venezuela is in the middle of a little local power play involving oil.  Venezuela runs an oil rent-to-own scheme in which countries in the region can buy Venezuelan crude on credit. 

6.  Still, OPEC lowered its oil demand forecast for 2009, which only makes sense in the current real market.

7.  While there may be some dispute as to whether Cuban oil potential is 20 billion barrels or five billion barrels, there’s no doubt interest is growing in developing the Caribbean nation’s offshore resources.

Either way, Cuba’s oil is attracting the attention of oil companies from around the globe. At the moment, Spain’s Repsol, Brazil’s Petrobras, and Norway’s StatoilHydro are overseeing exploratory drilling in the Gulf of Mexico. India, Malaysia, Vietnam, and Venezuela also have signed deals with Cuba.

Maybe Cuban oil potential is behind signs of a thaw in American-Cuban relations.

8.  Closer to home, there’s the NOIA oil and gas conference next week and with it, the annual speculation that Premier Danny Williams might say something earth-shattering despite the fact that making an announcement there would  involve sharing the spotlight with NOIA.

He hasn’t done anything like it before but people still like to stoke the hype.  Last year CBC got suckered into the whole thing in a big way;  this year it’s the Telly’s turn on a smaller scale and focusing on Hibernia South.

Now if the Hebron thing is anything to go by, what comes out the end could be a whole lot less than the hype suggested and some of the details have some really disturbing implications.  Of course, hype is more fun than details.

9.  Speaking of the NOIA conference, the theme this year focuses on the potential for the Arctic.

There’s the global perspective:

SESSION 2: TECHNOLOGIES FOR ARCTIC ENVIRONMENTS 2:30 p.m.

Russia’s Shtokman Project: an Update
Sergey Smityushenko, First Deputy Governor of Murmansk Oblast, Russia

Exploration and Production Options for the Alaskan Offshore
Mike Paulin, President, IMV Projects Atlantic

Pushing the Envelopment: R&D Advances for Arctic Oil and Gas Development
Jim Bruce, Deputy Director Ice Engineering, C-CORE

Canadian Frontiers Operating in Harsh Environments
Peter Haverson, General Manager, Global Drilling, International and Offshore, Petro-Canada

And the local one:

SESSION 4: FARTHER, DEEPER, COLDER 2:30 p.m.

Chevron's Growth Strategy for Atlantic Canada
Mark MacLeod, Atlantic Canada Manager, Chevron Canada Limited

Greenland - A Steppingstone to Arctic Exploration
Gregors Dam, Chief Geologist, Dong Energy

Playing to our Strengths
Mark Shrimpton, Principal and Practice Director, Socio-Economic Services, Jacques Whitford Stantec

Defining the Outer Limits of Canada's Continental Shelf in the Atlantic and Arctic Oceans Under the Law of the Sea
Jacob Verhoef, Director, UNCLOS Program, Natural Resources Canada

That last session is one to watch since the issue of  oil development at and beyond the edge of the continental shelf has implications for any developments in the Orphan Basin offshore Newfoundland.

And for those who are missing their fix of the government’s favourite economist, don’t worry.  NOIA is doing it’s bit to keep on good terms with government. 

Not only is there a reception at The Rooms, but Wade Locke is the lead speaker in the last session.  He’ll be talking up “Offshore Oil & Gas, the Economic Crisis & the Local Economy”.

If he sticks to his more recent lines, this should be fun.  Prediction:  He won’t be hyping non-existent aluminum smelter projects just as the demand for aluminum collapsed.   He might talk about the current economic situation but he might have to be more cautious about undermining the provincial government’s “we live in a bubble, all is well” talking point since the last time Locke’s comments were reported accurately, he got upset.

Right after Wade will be the provincial energy corporation’s Jim Keating who will, in all likelihood, be talking about the Lower Churchill.

Of course, that’s pretty much all there has been about the project:

• Project sanction was supposed to take place in 2009.  Then that got slid back by a mere six months. Now we don’t hear much talk of LC start dates at all.
• The land claims agreement with the Innu Nation – crucial to any development – seems to be deader than a doornail despite the initial hype about it.
• We do hear talk of slinging power lines through a UNESCO World Heritage site, something once described as the “most serious threat” to the park.
• There have also been contradictory statements about the future of the Holyrood generating plant.

And that’s just some of the stuff that hasn’t really been covered in any great detail in local media on the most talked about paper project in history.

Even if the Premier doesn’t lead off with anything Earth-shattering, there’s a prospect Jim and Wade can finish the NOIA conference with something really newsworthy.

 

-srbp-

Capex decline in NL higher than previously forecast: RBC

RBC Economics is predicting that Newfoundland and Labrador will lead the country in economic growth in 2007 but drop to the bottom of the provincial pile in 2008.

That's not really news. RBC has been saying it consistently for the past few months. Just like everyone else, including the provincial government.

The real story - as in March of this year - is that the province will be the only one in the country to experience a drop in capital investment.

On top of that the latest figures show RBC has increased their forecast capex drop for NL. it's closer to 10% now, compared to about 7.5% in March.

That's all about the absence of major construction projects in the province, like Hebron and Hibernia South. Last year's drop in capex was only about 2.5%.

Anyone wondering why the Premier is sending a positive message to potential investors after years of slagging? Take a closer look at the RBC figures. They forecast an economic situation no Premier could tolerate, especially when the means of getting out of the decline are entirely in your hands to implement.

Things can change and the tone sent by the Premier at last week's NOIA conference might just help that turn-around.

-srbp-

Rosy with a chance of goofballs

Not only will the provincial government continue to make billions despite dwindling oil production, that situation will continue over the next decade with the provincial government raking in around $2.0 billion annually.

That includes 2016 when – according to the production forecast used to make these awesome predictions - production will be a mere 65 million barrels.

The source of this sunniness is none other than the local Blue Team’s favourite economist Wade Locke.

Yes, folks, the same guy who complained when he was accurately quoted (but unfortunately contradicting the official spin) is predicting sunny days ahead.

And it’s there for all to read, on the front page of the Saturday Telegram complete with a pretty graph of annual oil production.

Not surprising, is it?

And there is no reason for doubt.

Locke remains confident in his forecast, a year after he gave it:

"That what I was expecting before, and that's what I'm still expecting."

Of course, he is. 

Just like he was confident when he forecast gigantic things for Labrador at a time when the global economy was tanking.  he expected it then and he still expected it right up until it didn’t happen.

Or like 1990 when he pissed all over the economic benefit from Hibernia.

Yes, those economic boons can be hard to predict.

We just have to make sure the credit goes in the right direction.

-srbp-

The return of The Can-Opener

Memorial University economist Wade Locke is back in the news and, not surprisingly he is saying things the provincial government will love.

Like his view of oil prices and the chances for a budget surplus bigger than the one forecast:

"The price of oil has already averaged in excess of $110, $115 per barrel for the year so far, so even if the prices were to fall down to $10 per barrel, they would still meet their budget projections of $87 a barrel," Locke told CBC News on Monday.

"So the forecasts in the budget should still be fine. They should have a budget surplus even bigger than they what they had forecast."

Perhaps Wade would like to actually, you know, read the budget estimates and see what the budget says about oil averaging 87 bucks a barrel and surpluses.

Wade also believes that the world has changed fundamentally - high demand and no new supply - such that oil will sell above US$90 a barrel way out into the future.  In the short-term, - up to two years, according to Locke - they might dip but the long-term price will be high, higher and highest. Asked if he thought oil prices would go to  ten bucks a barrel, Locke gave an emphatic "no". 

Like we haven't heard that one being forecast before, based on the change in market fundamentals yada yada yada. There's likely tape somewhere of an economist telling us that there was absolutely no way oil would fall to $10 a barrel again;  that would be right before it went to 12 and then eight bucks.

Uh huh.

Even the Lower Churchill will go ahead, completely unscathed by the tightening of world capital markets. No problems there at all.  The future is bright, as Locke says.

Maybe someone should fire off a proposal to Trevor for some government cash to build a shades factory.  Not Raybans or anything pedestrian but some unique NewfoundlandLabrador brand of sunglasses to keep the unique sun out of our unique as we go around under this amazing bubble of economic protection that evidently surrounds us. 

Other places are falling victim to the global crisis but not here.

Economics is truly a dismal science. Aside from stating the obvious - that things will be unsettled in the next year or two - the rest of what Locke said was ultimately about as useful as something we'd get from Aline Chretien's confidant and her psychic alliance. No shame in that:  none of us can predict the future with any accuracy.  When we do get close it is often due more to blind luck than any insight or foresight.

Maybe to give a sense of Locke's analysis in the past though, perhaps we'll go back to his view of the Atlantic Accord when Danny was in full fight and Wade's view after the deal was inked.

Wee bit different.

But hey, at least we now know who Danny Williams turns to for economic advice and has been probably turning to for advice for some time.

Turns out it wasn't Sarah Palin after all.

-srbp-

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.

-srbp-

Take a closer look #nlpoli

Premier Paul Davis hasn’t delivered any speeches, issued any news releases, or done anything else to explain who he is and what he wants to accomplish as Premier.

The guy has the job.

But he hasn’t told anyone anything about his plans.

On Wednesday, Davis had the perfect chance.  He delivered a luncheon speech to a few hundred people at the St. John’s Board of Trade.  

“Between now and next spring we’ll let our plans be known,” Davis told reporters after the speech.  “We’re planning as we’re moving along,” he added,  sounding suspiciously like an admission that they are making it up as they go along.

So what did he talk about in the speech?

The same sheet of paper #nlpoli

In all the elections in the 21st century, the three political parties in Newfoundland and Labrador have proposed what are essentially the same economic policies.

The differences are minor.

Oil down again..and the future won't be the same

Front month light, sweet crude (WTI) settled at US$63.22 on the New York Mercantile Exchange Monday, down $1.45 from Friday's close.

Brent light sweet settled at US$60.30  a barrel down almost $27 from the provincial budget's assumed average price. Oil companies operating offshore Newfoundland and Labrador use Brent as the reference price for crude from the Hibernia, Terra Nova and White Rose fields offshore Newfoundland and Labrador.

While there is some uncertainty as to what effect falling crude prices will have on the current budget, a general recession in major markets and a lower price of oil could serious reduce provincial government revenues in 2009.

At an average price of US$60 a barrel, annual production of 120 million barrels and a dollar premium of 30%, the province's oil royalties would be something on the order of $1.5 billion.  At 100 million barrels - slightly below the current year forecast of 111 million - the royalty take would be slightly more than $1.3 billion.

That is between $200 million and $400 million below the current year royalty projections in the budget.

To put that in perspective, bear in mind that if all the budget projections came true for the current fiscal year, the provincial government would be short $414 million on current and capital account and $794 million short overall.

Given the high oil prices at the front end of the fiscal year and the healthy consumer spending, the budget may come up balanced at the end of the year.  It almost certainly won't be in a surplus as it hasn't been in surplus for the past two fiscal years by any measure most people would understand.  If you have to borrow $110 million at the end of the year to pay off the bills and settle up accounts, then there was never really a surplus of $1.0 billion of $1.3 billion as claimed.  It may have existed in some form of accounting but at the end, the budget came up cash short.

As an aside, the Premier tossed aside an opposition claim that there was confusion coming from provincial government statements on the economic crunch.  He said something to the effect that the opposition spokesman didn't know the difference between cash and accrual accounting.

That's really neither here nor there.  In his news release last week, Kelvin Parsons noted that Dominion Bond Rating Service had projected a surplus of $291 million while the provincial finance minister had forecast $544 million when he brought down the budget last year.  Both those numbers are expressed on the same basis, as is plain from the context in the DBRS news release.

In other words, DBRS is projecting a smaller surplus than the one the government had projected. That much is absolutely correct:  $544 million versus $291 million

By the same token, the comparisons at Bond Papers - which some may  be finding a bit tedious at this point - have been done on a comparison of apples with apples.

No matter how one looks at it, the odds are high that the provincial budget for Fiscal Year 2009 (starting 01 April 2009), will have to either reduce public spending or undertake some borrowing.  If the current budget were repeated exactly as is  - exactly the same spending levels - and allowing only for the reduced oil revenues, the provincial government would have to borrow almost as much money as it would take in in oil revenues in order to balance the books.

Think about that for a second.

For the past two years, the provincial government has been able to underestimate oil revenues knowing that - in all likelihood - actual revenues would greatly exceed what they forecast.  At the end of the year, they have claimed huge surpluses.  In fact, the spending projections took into account the anticipated real price for oil, as opposed to the conveniently low-balled assumption. The auditor general made reference in his report earlier this year to the tendency in recent years to inflate spending based on highly volatile oil prices.

Starting this year, however, that pattern of low-balling revenues has essentially failed.  The global downturn, now estimated to last into 2010, means that for at least one and possibly the next two fiscal years after this current one, the provincial government will be dealing with dramatically reduced revenues.  At the very least, they can't count on the conjuring trick of windfalls to get them out of the heavy level of planned spending without resorting to borrowing.

And if you consider it, borrowing even a half a billion dollars a year is not a huge amount on a budget of $6.0 billion or more.

It is a huge amount if one considers doing that for a couple of years will add a billion dollars or so to the provincial direct debt.

It is a huge amount when one considers that at the same time, the provincial government is considering launching a development project on the Lower Churchill that could add as much as $6.0 to $9.0 billion on a public debt (accumulated borrowing) which is already hovering at about $8.5 billion.

Discussing the state of the current provincial budget balance may not be as useful and exercise as forecasting for 2009. The current administration may have to actually make difficult choices, for the first time in a very long time.

-srbp-

Marshall’s release doesn’t match DBRS public statements #nlpoli

Simply put, Tom Marshall’s most recent news release about the report by Dominion Bond Rating Service doesn’t match what the bond rating agency said in a news release about the provincial government’s finances.

You can see that pretty clearly if you read the whole release from DBRS.

The other side of the hill - choices and values 2 #nlpoli

Wednesday's post - Choices and values - came from the perspective of someone outside the echo chamber of politics in Newfoundland and Labrador.

Ordinary voters - who mostly do not work for the government -  don't feel like the pain from this budget is shared fairly by all.  They just don't believe any assurances that everyone else will feel comparable pain in the future.

But on the other side of the hill, the politicians have a perspective that we shouldn't ignore either.

Tourism numbers don't add up

It doesn't happen very often, but vocm.com seems to revealed a provincial tourism strategy that draws more from the locals than it does from boosting visitors to the province. 

The revelation came in two stages, separated by a couple of days so unless you were paying close attention you may have missed it.

On Boxing Day, we learned that the tourism industry contributed about $840 million to the local economy in 2007. The province's tourism minister is quoted as saying that the tourism budget has doubled since 2003 and that, as a result, we are seeing more tourism into the province.

But then later this week, we find out something else:

Tourism Minister Clyde Jackman is encouraging people in the province to take a vacation at home next year.  Jackman says between the icebergs, the whales and the some 9000 plus kilometres of roadway in the province, there is lots to explore. Jackman says this year local tourists comprised nearly 90 percent of the tourism business.

Take a second look at that last sentence and read it again.

Even though the tourism budget has doubled since 2003, fully 90% of the tourism business in Newfoundland and Labrador last year came from people traveling within the province.  That's according to the province's newly appointed tourism minister.

Go back to the Boxing Day story and do the simple math to find that the province's "tourism" industry apparently took  $756 million out of local pockets.

That's astonishing, and while the numbers are somewhat startling, the whole focus on local cash versus visitors fits the tourism department's marketing strategy since 2006. While the  marketing plan that year continued the main focus on visitors, there was a section devoted to a new  "in-province" project. By 2007, the program even had a title, albeit one lifted from a well-known fantasy movie.

Some of the changes in departmental emphasis were subtle.  For example, in April 2005, tourism minister Tom Hedderson announced that the provincial government as extending the operating season for visitor information centres into the spring and fall. These are not times when one might expect visitors to come to the province but they do represent the so-called "shoulders" of the season where the local tourist operators went looking for cash.

Then there was the cheesy series of television ads featuring Tom Hedderson that aired in 2006.  They appeared only on Rogers within Newfoundland and Labrador and were remarkable only for their generally miserable quality. In hindsight, though, they represented a major emphasis in tourism advertising on keeping locals in the province.

The local retention project is not something one would really pick up by casual observation.  After all, the new minister trumpeted the overall success of the tourism industry in 2007, apparently without breaking down the numbers. Likewise, a departmental "flash sheet" of facts and statistics gives only data on people coming from outside the province.

The flash sheet, incidentally, includes cruise passengers, even though the Love Boat passengers typically come into port, run around for a day and then head off off to their next location.  They are all good people and we welcome their cash, but they don't represent the economic impact of say a family of four from Teaneck spending a week traveling the province in a rented car, resting at the various bed and breakfast establishments and visiting a wide variety of cultural, natural and historical sites. Cruise passengers dropped $1.9 million in the economy last year (2006) out of a total of $364 million contributed to the local economic by visitors.

Before we leave that document, notice that overall, the number of visitors to the province dropped 1.5% over 2006.

The reality of the tourism figures Jackman and his predecessors have been using becomes clear when one looks at the tourism department's backgrounder on overall tourism performance for 2006 with a forecast for 2007.  You won't find that document on the tourism department's website.  You have to go to the finance department's statistics agency to get the facts on tourism.

According to the 2006 analysis, visitors to the province accounted for an estimated $364 million in economic activity in the province out of a total of some $820 million overall, as described in the 2007 budget.

That's right.  Visitors accounted for 44% of tourism dollars in 2006.  The rest of the spending  - 56% - must have come from locals staying in the province.

vocm.com may well have misquoted the tourism minister and the 90% figure. There's no denying the provincial government's own figures though. The majority of what it classifies as "tourism" is actually generated by residents of the province.

The relative proportion of overall spending by locals has actually grown in the four years of the New Approach to tourism much faster than visitor spending.  In a May 2004 statement to the legislature,  former tourism minister and current Humber Valley resort general manager noted that visitors generated approximately $300 million in spending in 2003 out of total tourism spending in the province of $620 million.

In other words, over the four years from 2003 to 2006, overall "tourism" spending increased by $200 million but only $64 million  - 32% - of that new spending was related to visitors.  In the meantime, the tourism advertising budget  - supposedly aimed at bring new dollars into the economy through increased visitation- has increased from $6.0 million to $11.0 million.

No matter how you look at it though, the tourism department's media comments on its "tourism" strategy don't add up. Nor does the advertising strategy seem to be working, no matter how much additional cash has been added to the pile.

It's time for a genuine new approach, so it seems, rather than just creative presentation of information.

-srbp-

Harris Centre economic forum: the media coverage

The Telegram’s James Macleod had a decent front page summary of the Harris Centre’s discussion of economic issues facing the province and the subsequent discussion.

The CBC has a super short version that is already bumped off the front page of its website in favour of stories like one on a baby bear in Terra Nova park, a batch of fake 20s making the rounds on the northeast Avalon and an earth-shattering story about two idiots who stole metal for scrap and found out it was worth more than they thought when they wound up in court for the theft.  Talk about if it bleeds, leads.

Anyway, for those in tune with evidently less important issues – how does an multi-billion dollar economic mess compare to two scrap metal dorks? -  Wade Locke’s presentation isn’t on line yet but here is the slide likely to be causing a few stomach’s to turn in knots. 

It’s Locke’s deficit forecast based on current trends and current government policy:

Within a decade the current account deficit will be running at record levels if the current administration carries on with its policies. We can expect more of the same from the incumbents since finance minister Tom Marshall is already trying to pretend that the mess doesn’t exist or that he has things under control. 

Unfortunately for the rest of us,  it does and he doesn’t.

- srbp -

Mid-week quickies

1. Conference Board provincial economic outlook

The Conference Board of Canada is predicting the central Canadian economy will slow in 2007, in tune with a slowdown in the American economy.

Newfoundland and Labrador is forecast to see economic growth at 5.7%, up from 2.9% in 2006. Growth is attributed entirely to resumed production at Terra Nova and Voisey's Bay.

No comparable new economic initiatives are on the table for Newfoundland and Labrador. In April 2006, the $10 billion Hebron development was shelved in a dispute over taxes and the provincial government's demands for an ownership position among the operators of the project.

No other initiatives - including a proposed second refinery at Southern Head, Placentia Bay or the Lower Churchill - are likely to receive approval.

2. Ontario/Quebec upgrade power connection

Ontario and Quebec will announce shortly plans to improve the electricity interconnection between the provinces.

"It will allow us to access more power from Quebec and ideally, over time, from Newfoundland, as well," said Ontario energy minister Dwight Duncan.

3. Cable smackdown draws crowd

Government's announcement it would acquire a 28% interest in a private sector cable deal is generating growing controversy across the province.

The Williams administration has been deploying cabinet ministers, back-bench members of the legislature and the usual parade of planted callers on Open Line shows to attack anyone criticising the deal.

So far, none of the deal's supporters have been able to explain why the provincial government invested in a private sector venture that the private sector had already started and was clearly able to fund.

Work began on the project when it was priced at $82 million. Government stepped in with a 28% interest in a project estimated to cost $52 million.

Meanwhile, at vocm.com, the public wasn't looking kindly on the deal. The on-line survey "Question of the Day" is not scientific but Williams and his Pitcher Plants have been known to try and skew the thing.

This time out, vox populi won out over TMV [Their Master's Voice] despite a last minute flurry from the crew who get their call-in scripts from the Premier's Office.

On Tuesday, the votes were running 60/40 against the Premier's plan to pump $15 million in public money into the deal. Despite a last minute flurry of activity by the Pitcher Plants, official results show opposition to the deal running at 51% to 47%.

4. Offshore Board tackles Hibernia South

The Canada-Newfoundland and Labrador Offshore Petroleum Board met on Monday and Tuesday to tackle the development application amendment for Hibernia South. Decision on the application was delayed pending appointment of a new chairman and chief executive officer.

No word on when a decision is expected.

5. Patrick new Mass governor

Massachusetts' new governor is Deval Patrick.

Among the campaigns, Patrick's most recent television spots are an example of American end-game positive messaging.

Understanding Population Changes #nlpoli

It seems like Danny Williams can’t go two weeks without getting his mug on the news so it wasn’t surprising that on Monday the Old Man called the media together to unveil the latest name for his land development project south of Mount Pearl.

He wants to call it Galway.  Nice for his mom. But not really very newsworthy especially since to the rest of us, the land development scheme will always be Udanda or one of the dozen other names local wags have stuck on the thing.

After the show, reporters asked the Old Man about the latest population projection for the province.  This one is from the Conference Board of Canada and it concludes – not surprisingly – that the longer term trend for the population in Newfoundland and Labrador is downward.

“In my opinion, it’s absolute bullshit,”   said Williams.

It isn’t bullshit, of course, and despite what he said on Monday, the Old Man knows exactly what is going on in the province’s population.  That classic Williams contradiction – the truth versus what he said – makes it’s worth taking a look at the issue in greater detail to understand just what the population projections are all about. 

“So where do they come up with this?” Williams asked. 

Here’s where.