Cormorant wins job of flying US President

A consortium led in the United States by Lockheed Martin has won the contract to replace Sikorsky SeaKing helicopters in the American Presidential flight. The contract, valued at US$1.7 billion, will see the consortium supply a total of 23 aircraft to be flown by the United States Marine Corps contingent that ferries the President on short flights.

Canadians will be interested in this since the EH-101 is flown by the Canadian Forces under the name Cormorant and used for search and rescue service. The same aircraft lost a recent Canadian competition to supply 28 ship-borne helicopters to replace the SeaKing. The winner of that job was the Sikorsky S-92, a derivative of the familiar SH-60 SeaHawk/UH-60 BlackHawk helicopters built by Sikorsky.

This whole business will become more interesting to watch as the United States Department of Defense looks to replace its own SeaKings in the coming years.

Looking a little closer to home, the website for the LockheedMartin proposal, Team US101, lists two recent rescues by Cormorants from 103 Squadron in Gander as proof of the aircraft's capabilities.

They even mention that the Cormorant staged from the Hibernia rig on one mission.

The contract award was announced on January 28, 2005.

Caution: Plain Spoken Newfoundlander at work

The Sun chain, among others, is reporting today that Chief of Defence Staff General Rick Hillier has scrapped the defence policy set to be announced by the Martin administration. Officials are said to be busily re-writing the document described as "boring" in its original form.

Bill Graham, the Minister of National Defence is reported to have pushed both for Hillier's appointment and for the complete re-write.

Surprise, surprise!

General Hillier is widely known and respected for his leadership ability, sharp mind and commitment to laying the facts on the table, good, bad or indifferent. National Defence Headquarters, sometimes known as Disneyland on the Rideau among Ottawa insiders, is likely adapting quickly to Hillier's new style.

Hillier first gained wider public prominence during the Ice Storm in 1998 when his 2 Canadian Mechanized Brigade Group oversaw the military support to civil authorities in Eastern Ontario. Some may recall that 129 soldiers from the local garrison in St. John's spent a couple of weeks just outside Ottawa working for General Hillier. They were in the air before many local reserve units mobilized and they did such a fine job that the company-sized organization wound up taking some 70 military engineers from Ontario under command. The Newfoundland reserve soldiers came from 1 Royal Newfoundland Regiment, 36 Service Battalion and 56 Field Engineer Squadron, with vehicle transportation being supplied by soldiers from 31 Service Battalion in Saint John New Brunswick.

True to form, Hillier came out personally to thank the soldiers as they waited at Ottawa airport for airlift home. He insisted on having his picture taken with them as a souvenir. That's the same approach he has taken in all his jobs.

Basically, it hasn't taken very long for the guy one Ottawa-based defence analyst called a "plain spoken Newfoundlander" to make his presence felt. That line apparently got knickers in a knot at one television program here in St. John's, where the crowd that put the show together took offense at the remark. Seems they were desperately looking for yet another slight to rant against in the wake of Margaret Wente.

Chaulk one up for Rick.

Chaulk one up for Bill Graham.

Now we just have to watch for the plan when it finally emerges.

Monday morning smile - here's the real can opener joke

Just to make sure we are all on the same page, here are some versions of the classic Can Opener joke.

Version 1.

Three people are stranded on a small island. One is a physicist. One is a circus strongman.  One is an economist. After a few days of surviving on fruit, they discover a cache of canned food, and they have to decide how to open it.

The physicist says to the strongman "Why don't you climb that tree, and smash the cans down on the rocks, and burst them open?"

The strongman says, "No, that would spatter the stuff all over. I can open the cans with my teeth!"

The economist says "First, we must assume that we have a can opener."

Version 2.

Two economists are trapped on an island with only a can of beans. They've tried everything they can think of to open the can of beans: sticks, rocks, their teeth, etc.

So the two economists are sitting around dejected when one of them yells, "I GOT IT!" [Remember they are economists, not grammarians]

The other economist gets excited and sits up with anticipation, the other tells him, "Let's just
assume we have a can opener!"

Version 3.

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Let's smash the can open with a rock." The chemist says, "Let's build a fire and heat the can first." The economist says, "Let's assume that we have a can-opener..."

and just for the variety, here is one of my all time favourite economist jokes:

It seems to capture the essence of many things.

A mathematician, an accountant, and an economist apply for the same job.

The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?"

The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says "What do you want it to equal?"

Second, we assume a can...

Now that I have had some time to go through Wade Locke's slides on the Atlantic Accord, I have a better idea of what he said last week in the"independent" assessment of the Accord deal. The slides and some other documents can be found at the Harris Centre website, along with a bunch of other interesting reading. This follows on my other post on this, First we assume a can-opener.

I've also checked a couple of details on my earlier postings. Apparently, Locke he does include higher revenues for Terra Nova in his projections, but it still seems he does not include Hebron or other revenue sources in his projections of whether or not the province will qualify for Equalization at any point under the January agreement. I am curious about the Terra Nova thing, though, since Locke's version of the revenue chart actually is more extreme than the provincial government one. It has an oddity, too. As revenues get higher and, in one Locke slide, as oil prices get higher, provincial oil revenues drop. There must be something I am missing.

If you check the Terra Nova site, for example you will see there is a plan to plateau production for a period. Logically one would accept that this should be a fairly steady revenue stream, assuming, as Locke does, that oil stays at constant price. Why the big peak, then?

Why the big peak, too, if we are actually bringing on fields in sequencerather than simultaneously?

Admittedly, I am working without the benefit of his actual comments on the night so I may misunderstand some of his points. That said, with his slides and with the media reports, I think I can offer some further observations on his presentation.

Generally, his comments are accurate but that is so solely within the information, context and assumptions that he uses. Shift any of those and his comments are anything from less accurate to completely off base.

Let's just take some key issues:

1. A logical comparison would be between what was sought and what was obtained. Wade Locke deliberately avoided this comparison and the reason is by no means obvious. There is no logical or legitimate reason to do so. He can easily model what was sought. It was a simple proposition: double revenues for the life of oil production. Poof! Instant slide. Then compare that to the January deal. Poof! Instant set of lines on instant chart. Compare both. Measure gaps, if any. Make observations. Make it more complex. Compare the pre-June 5 proposition: double oil revenues for eight years. Poof! Another instant line for comparison. Repeat measurement and observation steps above.

Locke didn't do that, though. Nope. Instead, he looked at each of the federal propositions. This presents some difficulties. The biggest one is that Locke isn't actually making a solid judgment on the apparent success or failure of the Premier's campaign. It would seem like both the most logical comparison and the most productive one for people looking for an independent assessment on which to base their personal judgment. It is curious that he wound up with a presentation that joins the chorus of cheers, hence my suggestion in an earlier post that Locke situated the estimate.

The next biggest difficulty is that Locke is working without the benefit of all the deals, details and counter details. One can only make the kind of observations Locke did make - like that each proposal was better than the one before - if he actually had details of every single nuance and detail in the discussion. For example, we know the Premier had some kind of long-term deal in June which he repudiated by his letter of January 10. Locke doesn't discuss this idea at all, preferring to completely ignore this deal. Locke also ignores the changing provincial position too. These considerations all call his final assessment into serious doubt.

What we wind up with is a case where our economist not only assumes a can-opener, he also assumes a can of beans. He then proceeds to open then figuratively and reveal their magical contents. No matter how you look at, Wade Locke's entire approach doesn't add up to a genuinely thorough assessment of the provincial position. We still have imaginary beans and a can opener

2. Locke concludes (if I gather correctly) that each federal offer from October to January got better, to the point where the province accepted the last one.

Well, as the post from Thursday shows, on paper there is actually very little difference between December and January. There was noticeable improvement from October to December after much negotiation, but the variations between December and January are anything but big. I'll highlight some specifics.

- In the core issue, the federal position remains the same: collect revenue plus offsets until past the Equalization threshold. After that, the existing Accord provisions apply. This is emphatically not what the provincial government sought in any of its three proposals and this is a point Locke apparently does not make at all. This leaves a huge gap in Locke's presentation.

- The lump sum payment concept is simply an adaptation of an October concept to the new deal. It doesn't materially enhance the January offer since, as I have argued elsewhere, the October deal could have netted out the same cash - if they tried for it. December was an improvement on October, but there was very little of substance changed between the December offer and January. The second-phase could be seen as unattainable, depending on your assumptions about economic performance that far out (2010-2012). Therefore, October might not have been that bad after all.

- The cash value of the deal in the short-term and long-term fluctuates with the price of oil. Therefore many of the deal's benefits are simply theoretical. It all depends on which scenario plays out; it's based on which can-opener you assume.

Of course, Locke has conveniently ignored the most obvious point: Danny Williams said yes to less despite his claim that he woudn't.

3. In order for this deal to pay off as Locke projects, oil prices have to remain at or below $32 a barrel for the life of the agreement, especially in the years when oil revenue supposedly peaks (06-08 depending on pricing). Locke's assumption appears to be based on an average price per barrel of oil. fair enough; most projections work this way. However, over the span of eight years, the average price could be US$32, with a low period at the beginning and peaks in between such that it averages out at $32. Unfortunately, if those peaks also push the province beyond the Equalization threshold, this deal won't pay off in the way Locke suggests. Assume a different can opener and you might not be able to open the can of magic beans.

4. Locke appears to assume no other economic activity exists. It is obvious from the slides that Locke assumes no Hebron/Be Nevis development and it would appear he also assumes no other projects such as Voisey's Bay will impact on provincial own-source revenues. As such, other economic activity could make this a really short-term deal as I have said elsewhere. In that case, Locke's praise of this deal would be...Well...Premature.

5. Clawbacks, clawbacks, clawbacks. Locke persists in the clawback mythology which only serves to confuse the issue and mask what actually occurs. For example, in slide labeled "What was the January Offer Worth?", Locke's presentation makes it appear that the maximum revenue is the red line, the oil revenue line. In the scenario being described, though, the revenue is actually cumulative and would be considerably higher than the $1.1 billion shown at peak. The oddest part of Locke's presentation is his claim that even though the supposed "clawback" climbs steadily from 14% currently toward 100%, at some magical point, when the province no longer qualifies for Equalization, the "clawback" magically disappears. What should be a 100% clawback, as Danny Williams logically used to argue, Locke says the clawback disappears. What a crock!

6. Problems/Uncertainties magically disappear. There is precious little difference between the December and January offers. Yet, Locke makes different conclusions on each. For example, in the slide "Issues with Respect to the December Agreement in principle", Locke lists as his first point that the province might not qualify for Equalization after 2006 depending on oil prices and "other things going on in the province". While this acknowledges one of the major shortcomings of Locke's assessment the same could be said of January as well. Where did you concern go, Wade? It's not like this is a minor issue.

7. Funky Math and Funkadelic Logic. In the slide on what was achieved in the January deal, there is some funky math. The "upfront payment" does not have a value of up to $400 million per year as Locke suggests. It is only $250 million for sure; any other value, such as interest, will vary widely depending on how the money is used. That looks like funky math to me.

As for funkadelic logic, Locke praises the change in the criteria for qualifying for the second eight-year phase of the offset deal. He apparently didn't notice that an "either/or" provision - meaning the province met one of two criteria, suddenly became an "and" criteria - meaning the province will have to meet two criteria simultaneously. Add in a more realistic assessment of the economy over thee next eight years and you can start to see some difficulties with hitting both criteria that we wouldn't have had with hitting one.

As for his comment about a clause for Phase 2 preventing the province from "falling off a cliff", Locke knows that the existing Equalization program has sufficient insurance against this ever occurring. It was a cute phrase Danny liked to used - maybe he got it from Wade - but it is a dubious concept at best. Of course, it won't be a benefit at all if, as Locke noted in his critique of the December deal, the province doesn't qualify for Equalization anyway.

Nasty things, those funkadelic assumptions.

I wish I'd ame the session at Memorial last week, if for no other reason than I could have heard the comments from political scientists Steve Tomblin and Chris Dunn. As it is, from Wade Locke's slides and his media interviews, I'd say his "independent" assessment fell as far short of the requirement as that offered by most news media in the province.

Too bad, really. It is difficult to have a participatory democracy when people are fed assumptions in place of analysis.

The Current and the EU

If you have never seen it, I strongly suggest you check out The Current, a monthly tabloid format newspaper printed in St. John's.

It's kinda edgy, sometimes funny and perhaps is the only newspaper in the province gutsy enough (by local standards) to print Josey Vogels' column, My messy bedroom.

This month's issue has a couple of interesting features. There's a bit on Icelandic independence. Odd no one ever asks if Icelandic fisheries is a business or a social program to keep people in "traditional" ways of life. There's also a bit on Margaret Wente, but to be honest, she is getting way more ink than she deserves. To make matters worse, The Current piece is lame and way beneath their usual satirical standards.

What I thought was hysterically funny was yet another mock government call for proposals. This time it is for a process whereby this place can leave Canada and join the European Union. The last fake call at least made some sense. This one is about as realistic as Newfoundland and Labrador applying to hook up with Djibouti. It's also kind of disappointing given that one of The Current's writers is Greg Locke, staunch nationalist. Does this means he now advocates trading in Confederation for cuddling up with Malta and Latvia?

When you're finished with The Current, you might just want to visit the European Union website. We'd have some difficulty qualifying as "European" in any meaningful sense of the term so the whole scheme would be moot anyways. But more to the point, since everyone - especially the nationalists - likes to rant about foreign overfishing and blames Canada for what the Spanish are doing (Go figure that one), proponents of the EU option might just want to have a look at the EU fisheries page. Maybe it won't be foreign overfishing if the overfishing is done by our EU partners. We can then say we ended foreign over-fishing by making them not foreign.

That would sound like Gwynne Dyer's claim a few years ago that war as we know it was gone after the collapse of the old Soviet Union, even though there were still civil conflicts going on within states like Yugoslavia. Talk about semantics. Interstate warfare was over, therefore everything was peachy. Unless you were a Tutsi or a Chechin. But be happy knowing you were not slaughtered in a war. Nope, it was a civil disorder.

But back to the point, just to get a genuine taste of the EU fisheries policy, here's the main quote on the introduction page:

"The EU fishing industry is a major source of employment and food. It is therefore important to prevent over-fishing by some to the detriment of all. The European Union has a common fisheries policy (CFP) in order to manage the industry for the benefit of both fishing communities and consumers."

Hold on to your turbot-on-a- stick.

While you are surfing through the EU sites, just take a look at the other member states, not the new ones, but the ones with real clout. Like Spain.

And Portugal.

And France.

Now imagine President Danny Williams in Brussels trying to convince them to stop devastating a fishery that is - oooh easily half a freaking world away from them and a place they used to plunder when it was their colony.

You think we have troubles being heard in "colonial" Ottawa. Bring on the Mannequin Pisse!

Now, let me just check and see if the United Federation of Planets has an opening for new members.

Country evenly divided on same sex marriage

Anyone who has heard federal member of parliament Gerry Byrne try to explain the position he is taking on the same-sex marriage bill can understand the difficulty he is having once they see the poll results below.

Even when a majority of the province is moving in one direction (backing Danny Williams just recently), Byrne still manages to take so many sides on the issue that he makes master waffler John Kerry look like he has steely determination and single-minded vision.

In this instance, Bryne has managed to concoct some absolutely cokamammie rational that links same-sex marriage, minority rights, ending denominational education with voting against a simple change to legislation that would actually make every reasonable person happy on a divisive issue. Oy vey!

A poll conducted last week by SES Research shows that while Byrne's logic may not be kosher, certainly he can take comfort in the divided views among his fellow Canadians.

Respondents were evenly divided when asked to indicate whether marriage as being between a man and a woman or allowing people of the same sex to marry best described their opinion. Forty six percent [46%] said marriage between a man and a woman best reflected their views. Forty five percent [45%] said allowing members of the same sex to marry best described their view. Of the remainder, nine percent were unsure or selected neither of the two choices.

Here are the actual questions and response percentages. This was a random telephone survey of 1,000 Canadians conducted by SES Research between Jan. 28 and Feb. 2, 2005. The results have a margin of error ±3.1%, 19 times out of 20.

Percentages may not add up to 100 due to rounding.

Question - Some people think that same-sex couples should be allowed to belegally married and be recognized like couples made up of a man and a woman. Other people think that only marriages between a man and womanshould be legally recognized. Which of these two opinions, if either, bestreflects your views?

46% Marriage only a man and a woman
45% Allow same-sex couples to marry
5% Neither
4% Unsure

Question - If your local Member of Parliament had views different from your own on the issue of same-sex marriages, would you vote against your federalMP for that reason?

53% Would not vote against MP
42% Would vote against MP
5% Undecided

Question - Thinking of the upcoming vote on same-sex marriage should yourMember of Parliament vote based on……[ROTATE]

54% The views in his/her riding
22% His/her personal views
16% His/her official party position
8% Undecided


Note for those confused by some of the introduction: The sudden lapse to Yiddish is just a symptom of a piece I wrote a while ago and just recently re-read, called The Yiddish of Newfoundland Politics. Maybe I'll post it here soon, although it is a little dated. It could be time to update the concept that takes into account the mishegas about the Accord and the sheer drek being pumped out by some media both here and across Canada on the who issue.

Somewhere along the line I managed to start slipping Yiddish into my speech. The language seems to be tremendously expressive and captures so many aspects of life in a single word or single evocative phrase.

The link I supplied is to a New York deli that has as part of its website a dictionary of Yiddish words and phrases.Sadly, I don't have a Yiddish dictionary that matches my copy of The dictionary of Newfoundland English, so I make do with what I can get. Hmmm. That reminds me to find the online version of that so non-Newfoundlanders will be able to decipher some of the local expressions that may from time to time creep into these postings.

A la prochaine, mes amis.

Some links to offshore oil and gas websites

Just a few links to give you more background information on offshore development.

Hibernia: Link to the official site for Hibernia Management and Development Company.

Here's Petro-Canada's site for Terra Nova.

Then there's White Rose. Just watch out for the flash animation at the start if you have dial-up or a slow connection of some kind. Just a lil design hint, Husky guys - make the flash an option or let people somehow skip it. I know it cost you a lot of cash, but after the umpteenth trip to the site it becomes more of a nuisance. For those people out there that have trouble with flash, lack of a "skip it" feature just turns them off.

While we are at it, here's a link to Offshore Technology.com and its summary of North American projects. Easy to read, with lots of good graphics and some easy to decipher charts, each of the project descriptions gives a fine overview. Take the one on White Rose for example, which gives a 3-D illustration of the field. Awesome!

Now if only the Canada-Newfoundland and Labrador Offshore Petroleum Board (CNOPB) could find a way to get just a glimpse of their core and sample storage online. This is the regulatory authority for offshore development and while their mandate does not include public education as a Number One Priority - and nor should it be for them - the storage facility has a wealth of information that would assist the lay public appreciate what is going on offshore Newfoundland and Labrador.

I had the opportunity of getting a tour of the facility a couple of years ago and it is truly amazing. Now when people talk about the heavy oil at the Hebron/Ben Nevis field or its heavily fractured structure, I can appreciate what they are talking about. From the 3-D seismic computer models CNOPB can build, the whole world that far offshore and that far underground is right in front of your eyes.

CNOPB Core Storage and Research Centre is accessible to the public, although priority seems to be given to academics and other researchers. There are fees that apply for use of the facility and those are available on the CNOPB website under General and the Catalogue of Information and Services.

Offshore royalties - the easy version

For those of you who missed it - like me - here's a story Moira Baird filed in March 2002 on Hibernia royalties. It describes in general terms the types of royalties that come from projects like Hibernia and Terra Nova and White Rose. I'll give all the detail like page, placement and so forth for those who might want to cite this somewhere other than coming from my blog. Like I said in the other post, Moira is "industrial strength", that is, she gives it to your fair, factual and, in this case, reduced down to the point where even someone like me can actually get it.

Many thanks to Moira and The Telegram for providing this copy. Note: I have changed the paragraph structure slightly from the original. Otherwise, the piece appears as it did in the print original.

Background information is available on Hibernia and Terra Nova and the generic offshore royalty regime from the Government of Newfoundland and Labrador. There is a separate generic regime for onshore production, like the site at Port au Port.

Province's Hibernia royalties continue to trickle in: Terra Nova project holds more promise for Newfoundland coffers

St. John's Telegram
Wednesday, March 6, 2002
Page: A3 / FRONT
Section: News
Byline: Moira Baird
Source: The Telegram

Newfoundland and Labrador won't get rich from its Hibernia royalties -- but they continue to trickle in.

By the end of March, the province's annual royalties from its largest offshore oilfield are expected to total $29 million for the fiscal year. Since Nov. 17, 1997, when Hibernia started producing oil, until March 31, 2002, the province's royalty share is expected to total $65 million."

The province receives monthly cheques from Hibernia," said Darryl Mercer, spokesman for the Department of Mines and energy. First oil flowed from Terra Nova Jan. 20, and the royalty cheques from that project are expected soon. By comparison, last year's production at Hibernia was worth substantially more than the province's royalty cheques.

Using Petro-Canada's average price of $36.63 Cdn per barrel, as noted in the company's 2001 annual report, Hibernia oil was worth about $1.9 billion last year. Monitoring and auditing offshore oil royalties is a complicated business. The job falls to the petroleum projects monitoring division, part of the Department of Mines and Energy.

TWO TYPES

There are two types of royalties for Hibernia -- one is the basic royalty rate, the other is the net royalty rate.

The basic royalty rate is determined by the price of a barrel of oil, the level of production, and the cost of transporting that oil to market. (That cost includes shipping the oil from the Hibernia platform to the transshipment facility at Whiffen Head, Placentia Bay in tanker shuttles.) The basic royalty started at one per cent and goes to a maximum of five per cent.

Right now, Hibernia is paying at three per cent. The net royalty of 30 per cent doesn't kick in until "payout" has occurred. That means all the costs, plus interest, incurred by the Hibernia consortium to produce oil must be paid off before the province receives any net royalties.

Those costs submitted by the Hibernia partners are regularly audited by the province's petroleum projects monitoring division. When the Hibernia consortium asked for permission to increase production to 180,000 barrels a day, the province, in turn, asked for a speeded-up timetable for the basic royalty rates. A deal was worked out by July 2000.

Previously, that basic royalty regime increased by a percentage point every 18 months until reaching a maximum of five per cent. These days, the province gets a royalty increase every 18 months, or every time Hibernia reaches specified production levels -- whichever comes first. That rate now stands at three per cent. It will reach four per cent when Hibernia produces 194 million barrels of oil, and will top out at five per cent in February 2004 or when production hits 268 million barrels.

But those royalties can also fluctuate with the price of oil. That's thanks to an "index factor," which reduces the royalty rate as the price of oil decreases from one month to the next. If crude oil prices fall below $30 per barrel in 1997 American dollars, the royalty rate is reduced during the repayment of $1.2 billion in loans that were guaranteed by the federal government.

The index came into effect last year, and will last for eight years. (To get Hibernia off the ground, Ottawa also invested $1 billion in the project.)

ONE EXAMPLE

For example, if the price of oil drops to $15 US per barrel in 1997 U.S. dollars, then a two per cent royalty rate would decrease to one per cent for a month.

Each month, the federal government calculates this index for both the province and the oil companies. Although Terra Nova is a smaller oilfield than Hibernia, it will produce more generous basic royalties for the province. Those royalties start at one per cent and reach a maximum of 10 per cent based on the level of production. Unlike Hibernia, Terra Nova has no index factor that will reduce the monthly basic royalties.

And also unlike Hibernia, there is no "payout" of pre-production costs to the oil companies that will eat into future net royalties of 30 per cent. The more profitable the Terra Nova oilfield is, the more net royalties the province will receive. Any future offshore oil projects, such as White Rose, will use a generic royalty regime and the province is still designing a competitive natural gas royalty.

-30-

Outside the Box - The Stunnel

Call it the Stunnel.

If the Channel Tunnel became the Chunnel, then the name for our fixed link makes sense. Stunnel is also a good name for an idea that is pretty stunned when you look at it a little more carefully.

A couple of Scandinavian social scientists wrote a book last year called Megaprojects and Risk. After studying a bunch of European projects like the Chunnel, they came to a set of surprising conclusions: first they found that proponents grossly overestimate the benefits of their Big Idea. Second, proponents grossly underestimate all the costs.

Consider the Stunnel idea. According to the Stunnel web site, the project would cost $1.3 billion or thereabouts. It would need an average of 1400 cars traveling across it per day, with a peak of 3, 000 per day, in order to be viable. Proponents also claim it would produce upwards of 40, 000 direct and indirect job during construction, although this would last for a total of 3 years. Using the ever popular argument, proponents say the Stunnel would be an engineering marvel and attract tourists from around the world.

Let’s just look at the traffic flow. Right now, the main surface carriers are Marine Atlantic and Oceanex who between them carry 882 vehicles per day into the province. Even if we closed those two carriers and forced everyone to use the Stunnel, we’d still only have 63% of our break-even average. Obviously, we need more people to use the Stunnel.

Tourism, you say? Well, consider that the largest number of tourists come to the more populated areas of the country. For Newfoundland and Labrador, that means that surface travelers come through Atlantic Canada and cross the ferry to add Newfoundland to a tour. Would they come through one of the most desolate parts of Quebec to get here? Doubtful. As for those engineer groupies, think of how many tunnels Kierans and company say have been built in warmer places? If I loved holes in the ground, the last place I’d go to see one is the Straits of Belle Isle where it is freezing cold in June.

Right from the start, the very reason for building the Stunnel – lower costs owing to large usage - goes out the window. Even if we forced everyone to use the Stunnel, and allowed some reasonable rates of growth in traffic, it would be years, maybe decades, before there was enough traffic to meet the break-even traffic numbers Kierans says his project will need from the beginning.

Consider our own recent experience. The Tobin government started building a road around the southern coast of Labrador to meet up, ultimately, with the highway out of Labrador City. There were plenty of promises of great benefits. Already, we have found that shipping goods to northern Labrador ports is more costly than sending them from Lewisporte. The roads can’t be kept open to traffic in winter, and if that wasn’t bad enough, we already know from the Auditor General and PriceWaterhouseCoopers that the province can’t maintain its existing roads.

There are already signs that Labrador is coming more closely connected to Quebec than the island. The Stunnel would link the whole province to Quebec via an isolated stretch of road. We’d move away from the short routes to our historic partners in the Maritimes and New England and link up with Quebec City. That’s a big strategic implication that can’t be overlooked.

As for cost, we have only seen the beginning of the escalations. The proposal is only a couple of years old and already Kierans and company have tripled the costs. The $1.3 billion project that Danny Williams bought into three years ago is already estimated to cost $4.3 billion. Megaproject proponents grossly underestimate costs. They’ve shown that already. As for traffic flows, the higher the cost, the more cars we need to make it pay. If we don’t have enough traffic to support the first cost estimate, where are the cars coming from to support a project three times as costly?

-srbp-

Origins of The Stunnel

Someone kindly forwarded this little gem to me. I just couldn't help but chuckle and shake my head at how we all seem to be stuck in some sort of bizarre time loop.

February 5, 1966, Toronto Star

Joey plans undersea 16 1/2 mile tunnel

ST. JOHN'S, Nfld. (CP Special) -- Plans for a tunnel under the Strait of Belle Isle between Newfoundland and Labrador to carry cars, trains and power cables and to connect with a trans-Labrador highway were outlined in the Newfoundland legislature by Premier Joey Smallwood yesterday.

He said the 16 1/2 mile tunnel would cost about $43 million to build and take four years.

-30-


If only, if only I was makin' this stuff up.

Sad to say, this is a real news clipping of a real story from 39 years ago. Even sadder, this was actually the first major development initiative announced by Premier Williams last year when he tossed tens of thousands of dollars into a pot to study the feasibility of the fixed link concept.

Premier Williams remains committed to this nutty idea even though the current estimated cost is more than $4.5 billion dollars. Of course, the Premier claims it will generate thousands of car trips per day (where hundreds exist today) and that people will be clamouring to see the big hole in the ground. Who does he plan to get to pay for it? Why, Paul Martin and the Government of Canada of course.

Hmm. I wonder what the Globe and the Star and the Empire Club will say when they get Danny's pitch for The Big Busy Ditch (copyright pending)?

Hibernia and Terra Nova Royalties

Today is the day to get The Telegram or visit the online site.

Check out the business story by Moira Baird on Hibernia and Terra Nova royalties. I have known Moira for a while and from my perspective she is an industrial-strength reporter. Solid. Dependably fair. Factual. Fortunately, there are lots of them working in the news business in Newfoundland and Labrador. They are the best in the long run.

Moira's assessment is that combined royalties - not direct revenue in total - will hit more than $200 million this fiscal year. Factor in the offsets in the existing Atlantic Accord and other direct revenue related to oil and I stick by my prediction we are going to be well over $300 million before the end of the fiscal year. Add to that the $133.6 billion in added offsets from the new deal and the revenue stream from the offshore mounts.

Flip back to Wade Locke's slides and have a look at a few where he notes oil revenues. I may have issues with his interpretation, but I am not going to question the core facts on which he builds his case. A couple of things leap out. First of all, it is clear the province's October revenue slide was based on oil prices at less than US$32 per barrel. Second, you start to see the value of the Atlantic Accord. The greatest economic benefit to Newfoundland and Labrador comes from the Mulroney/Peckford Accord and from the royalty regimes negotiated by successor provincial governments. Danny Williams has added some good cash to that mix but the real value is in the original Accord.

That's what I have been saying since the beginning.

Now I have to visit the doctor to fix the shoulder dislocated by patting myself so hard on the back!

Margaret Wente again

Alright.

Did anybody actually read either one of Margaret Wente's columns? I mean actually read and comprehend, inwardly digest and otherwise get what she was saying. It reminds me of an e-mail I got today from a friend who passed on the comments of a Conservative friend of his. This Conservative guy couldn't understand that I found a positive aspect to Margaret Wente's first Danny Williams column.

Well, b'y, I read it. And compared to Charlie Lynch, Margaret Wente should be given a guest spot on Hatching, matching and despatching or be feted by the local "Newfoundland" Club, if there is one anywhere near The Beaches.

All this comes after seeing the Fair Deal posting today and hearing Dave Salter on Out of the Fog. I am not even sure I'll turn on Nite Line for fear of hearing the same thing.

Let me make it easy: to understand Margaret's lastest musings on Newfoundland and the country, read the Globe and Mail editorial (If the provinces shout, Mr. Martin's all ears) on the other page.

And just so that there is no mistake and everybody gets it, here is the message:

The Globe and Mail does NOT support this offshore deal.

Let me go a step beyond that. The Toronto Star doesn't support the deal either.

What bothers them is the idea that Danny Williams got what he was looking for: oil revenues plus Equalization, even if we are richer than Ontario and wouldn't qualify for Equalization. So here we are with everyone in the country thinking danny won, when he didn't. Everyone in Newfoundland and Labrador is over the moon and more and more people across the country are definitely not that happy.

The problem with that is, as far as I am concerned, everyone is in a knot for the wrong reason.

So with that said, CSI is on and I have some Tim's coffee to enjoy.

First, we assume a can opener

This post started yesterday before I found out that Wade Locke did much the same thing at the forum at Memorial University by comparing the December and January proposals on Accord offsets. I fell out of bed this morning listening to David Cochrane's report and my eyes opened wider staring at the VOCM account on their website. Now that I have seen the slides from Locke's presentation I need to see a doctor to reattach my jaw.

On the face of it, it sounds like Wade did a fine job of situating the estimate, instead of estimating the situation. Or to put it in the terms of an old joke about an economist, 'First, we assume a can opener". In this case it seems to be more a case of "first, we assume this is a splendiferous deal". I'll explain my observations in a couple of posts, and to make sure everyone understands this - while Locke may be a fine economist, I think he seriously distorts the ups and downs of different proposals. He grossly overestimates the "monumental" nature of the January deal because of his assumptions or omissions.

Following is my comparison between the federal draft agreement in principle from December and what appears to be the agreement that was accepted by the Government of Newfoundland and Labrador in Ottawa on 28 January 2005. The bits in italics illustrate the changes to the basic structure of December deal that turn it into the January one.

Draft Agreement in Principle between the Government of Canada and the Government of Newfoundland and Labrador and the Government of Nova Scotia

(December 2004) with January adjustments (italics)

1. [Note: This clause would remain unchanged] This agreement reflects an understanding between the Government of Canada and the Government of Newfoundland and Labrador and the Government of Nova Scotia that:

· both provinces already are collecting and will continue to collect 100 percent of offshore resource revenues as if these resources were on land;

· the Government of Canada has agreed to provide additional offset payments to these provinces in respect of offshore-related Equalization reductions.

2. [No change] The Government of Canada intends to execute its commitments under this agreement through legislation that will authorize additional payments to provide100 per cent offset against reductions in Equalization payments resulting from offshore revenues.

3. [No change] For the fiscal year 2004-05, the value of the additional offset payments will be:

a. For Newfoundland and Labrador: $133.6 million;
b. For Nova Scotia: $30.5 million.

4. For the fiscal year 2005-06, the value of the additional offset payments will be:

a. For Newfoundland and Labrador: $188.7 million;
b. For Nova Scotia: $26.6 million.

5. [No change] Commencing in 2006-07, the annual offset payment for each province shall be equal to 100 per cent of any reductions in Equalization payments resulting from offshore revenues. The amount of additional offset payment shall be calculated as the difference between the Equalization payment to be received by the province under the Equalization formula as it exists at that time if the province received no offshore petroleum resource revenues in that year, and the Equalization payment for that province in that year under the Equalization formula as it exists at the time, net of any payments made with respect to existing accords or Equalization offset provisions.

6. [No change] For 2006-07 to 2011-12, in any fiscal year, if either province no longer qualifies for receipt of an Equalization payment, no additional offset payments will be made to that province, beyond payments specified in existing accords.

7. This arrangement will be in effect until March 31, 2012. No later than March 31, 2011, Canada and each province will, on a bilateral basis, begin discussions to determine whether a successor arrangement with each province should be put into place for an additional 8-year period beyond 2012. There will be no further arrangements for a province beyond March 31, 2012, if the province's net per capita debt servicing costs becomes lower than that of four other provinces not party to this agreement and ["and" replaces "or" in the original] the province has not qualified for Equalization payments in 2010-11 or ["or" replaces "and" in the original] 2011-12. [Note: This is changed from the requirement to have a balanced budget or be receiving Equalization. There is now a double requirement to qualify for the second eight-year phase. See the provincial backgrounder on this point from Monday.]

8. Any successor arrangement with a province would be in effect for the period 2012-13 to 2019-20. [Note: the previous conditions for continuing in the second phases appear to have been replaced by the sole requirement that the province must continue to qualify for Equalization. The new clause would contain a provision that once the province ceases to qualify for Equalization in the second phase, there is an immediate transfer to two years of declining offsets with no prospect for reinstating the offset payments should the province qualify for Equalization again before 2020.]

9. [Deleted] The Government of Canada commits to providing new offset payments for an additional 8-year period, starting with the first fiscal year of offshore commercial production, if any, from the Deep Panuke project in Nova Scotia or the Hebron project in Newfoundland and Labrador. Any such additional offset payments shall be limited to the revenues from these projects.

10. [No change] The Government of Canada agrees that if, in the future, it enters into an arrangement with another province or territory concerning offshore petroleum resource revenues, then either province may elect to enter into discussions with the Government of Canada to amend this agreement.

11. [New clause, words to the effect that] The Government of Canada will transfer to the Government of Newfoundland and Labrador the sum of $2.0 billion representing an advance on payments under this agreement. No further payments will be remitted to Newfoundland and Labrador under this agreement unless the provincial government qualifies for such payments under this agreement and the cumulative offset entitlement exceeds $2.0 billion.]

12. [New clause, words to the effect that] If the Government of Newfoundland and Labrador disagrees with the Government of Canada on how the offset payments have been calculated starting in 2006-07, the province can request that the federal calculations be audited to ensure they are consistent with the 100 per cent principle.

13. [New clause, with wording to the effect that] The Government of Canada and the Government of Newfoundland and Labrador agree that no later than the beginning of the sixteenth year of the agreement, the two orders of government will jointly enter into a review of the agreement.

The future of Goose Bay

A caller to Open Line this morning chastised the Prime Minister for the failure over the past 15 months to declare Goose Bay operationally essential to the Canadian Forces.

This notion is merely a clever way of forcing the federal government to pour millions into Goose Bay without the base actually being operationally relevant to the Canadian Forces. It isn't now; there simply isn't the same strategic threat that existed during the Cold War, nor is there the operational need for ferrying aircraft that existed when the base was built in 1941.

The Canadian Forces has a surplus of bases to meet its needs and Goose Bay is a long way from being vital to the defence of Canada in the same way that other bases are. It certainly doesn't provide the broad training opportunities found at bases like Gagetown, either, at least not for a military force as small as the Canadian Forces.

Two news stories in the past months point to a potential role for Goose Bay that might work. Both stories focused on the use of Canadian bases for winter training and testing. One was about British Forces coming to Goose Bay to train in a winter environment they just can't get at home. The second was about testing of new British field radios in a harsh winter environment.

Goose Bay could easily become the Mountain and Winter Training Centre for the Canadian Forces. It would establish a small centre of expertise at Goose, affiliated with the Infantry and Engineering Schools at Gagetown. Goose Bay would become the focus of all trials and training for Canadian personnel and equipment in a northern environment. One of the biggest advantages of the centre would be the ability to attract allied military forces, including the US Army's 10 Mountain Division, the French Legion Etrangere, and the British Royal Marines and others to learn from the Canadian Forces including Canadian Rangers.

This idea isn't as big as declaring Goose Bay operational essential to the Canadian Forces. Nor would it provide the level of ongoing activity as low altitude flight training. It is, however, a workable idea and one that would generate revenue for the base and for the local community.

Provincial Direct Offshore Revenues - October

Remember that chart from yesterday?

Well the red line on top labelled "commitment" was supposed to indicate what the Prime Minister's commitment supposedly had been in June. See some earlier posts to clarify that point.

Actually, that number is the provincial government's own estimates of direct offshore revenues (royalties plus corporate taxes), based on what they called the "high price assumption" for oil. Some people have suggested to me this "high price" could be as low as US$35 per barrel, but since I can't confirm that let's just take it as the figures they worked with. It's good enough for the purposes here. The numbers below are approximations based on the chart; goodness knows the provincial government would never release the actual numbers.

Now bear in mind, that under the Atlantic Accord, the Government of Newfoundland and Labrador collects every single nickel of these amounts and doesn't lose even the teensiest bit. Remember too that this figure does not include any offsets at all. To get the figure including the current deal, add $250 million to each figure.

2004: $320 million
2005: $400 million
2006: $600 million
2007: $820 million
2008: $680 million
2009: $650 million
2010: $600 million
2011: $480 million
2012: $390 million

Total: $4.94 billion

Now for some perspective. Based on these figures, and assuming the current Equalization standards and nil economic growth, the provincial government wouldn't qualify for Equalization in 2007. However, it would qualify for Equalization in every other year. As such, it would almost certainly qualify for the second eight-year phase of offsets.

There are some problems with that set of assumptions, though.

First, the national economy will grow, as will the provincial one. The relative rates of growth will affect what it would take to put the provincial government over the threshold so that it no longer qualifies for Equalization.

Second, if this estimate from October is based on oil prices at $35 per barrel, then these figures need to be higher by some amount. Oil in October was running at US$51 per bbl and currently is in the range of US$45 per bbl. It is more likely that the provincial government will be off Equalization faster and stay off for more than one year than the numbers above would suggest. For example, if we assume a 15% increase in those revnues based on higher oil prices, the province would cross the Equalization threshold within two years (as estimated by the Premier late last year) and would stay off Equalization beyond 2012 if one includes the other economic growth noted below.

Third, this scenario does not include any other growth in the local economy. We know that Voisey's Bay will be onstream before 2008 and therefore will be generating significant revenue. As well, we can anticipate development of Hebron-Ben Nevis well within the first eight years of the new offset agreement. While the proponents have not discussed royalties with the province yet, we would have to add on to the revenue figures given above. Again, if the province didn't go off Equalization as in the second point above, Hebron-Ben Nevis would almost surely push it over.

Fourth, we don't know if the provincial officials included changes to the White Rose and Terra Nova royalty regimes in these estimates. Terra Nova is moving to Tier 2 royalties, which brings more money for the provincial government, since the project is now considered to have recovered its start-up costs. Under the same conditions, White Rose will likely cross the same threshold before 2010, thereby increasing provincial government revenue.

For those who are counting, the value of the offsets under the new deal is about half the actual direct revenues using the estimates of oil at prices about 25% to 30% below current prices.

Taken all together, this is the "most likely scenario" referred to in previous posts.

Offshore Revenue Math for....well...people who can add

Ok, I know I promised a sort of score sheet, but I am working to put it into a concise, easily understood format that shows a balanced view of the deal.

In the process of reviewing a bunch of files and comments, though, I noticed something really interesting.

Remember the October offer from Ottawa? That's the one that had Danny Williams throwing up his hands and quickly walking out of a meeting in Ottawa [corrects my error of Winnipeg]. Mind you it wasn't such fast walking that reporters could not still get comments as he walked. That's the same one where Newsworld had a great shot of him from behind, in one cutaway, where you see his jaw muscle clenching and unclenching from the tension.

Here's a link to a little chart in pdf format that the Premier and his finance minister used in St. John's to condemn the October offer. Notice the green line at the bottom. That is the provincial view of the October 22 offer which, the Premier claimed, capped offsets at around $250 million annually until 2012. He said at the time, this was far short of the "100% " he sought.

Leap forward a few months and many jaw-clenching moments later. There is now a "monumental" deal with a lump sum payment, up front of $2.0 billion over the first eight years of the deal. With trusty calculator in hand, divide $2.0 billion by 8. Look in amazement at the little LCD screen as it shows:

$250, 000, 000 !!!

Now, of course, theoretically, this new deal, the "monumental" one, could possibly yield more cash. That is, it could if the province doesn't make so much money it goes off the Equalization rolls before 2012. That is it could if the province also stays on Equalization into the second eight-year phase. That second year phase is one of the things that changed in the federal offer in December, but if Newfoundland and Labrador likely won't qualify for it, the second eight years is a theoretical benefit only.

But think about it for a second. The key element of every federal offer has been that the 100% offsets last only so long as the provincial government receives Equalization. That's the basic principle of the deal. (Ignore the amount of cash for a second since it varies with the price per barrel of oil.)

Now put the cash back in and take another look at it. Poof! Same deal, give or take a couple of minor adjustments. I can say same deal because the October letter from federal finance minister Ralph Goodale basically laid out the principle on which the added money would come.

The formula put a cap on the offsets, which the province valued at $250 million per year, and the feds offered $1.4 billion as a lump sum settlement in place of the year-by-year approach. Now simple math would have yeilded $250 million times eight which equals $2.0 billion.

Since the $1.4 billion was based on an earlier calculation of revenues, I am just curious why no one just suggested (either in October or December) that, maybe, just for the sake of exploring the creative options here, the province might consider a lump sum settlement of say...... $2.0 billion. After all, the October formula and the current deal functionally work out to the same cash endpoint.

Just to give you further food for thought, here's a quote from the Premier in The Sunday Telegram, 30 January 2005, page A2 under the headline 'Creative' proposal bridged the gap:

"There was a genuine attempt by everyone to find a solution. And, eventually, because of the complexities of some of the issues it came down to quantifying a dollar amount, which is basically what we settled on at the end of the day." [Emphasis added]

Don't get me wrong. I still think that when everything is added up this is a good deal for the province. Big congratulations to the Prime Minister and the Premier for reaching an agreement that works for both the Government and people of Canada and the Government and people of Newfoundland and Labrador.

It's just when to take a close look at "what we settled on at the end of the day", you start to wonder why it took so long to get to back to where everyone was in October?

-srbp-

Comment on the Provincial Government backgrounder

Following is taken from the backgrounder accompanying today's new release from the Government of Newfoundland and Labrador. I apologize for the length, but hey, it is a complex subject. I will leave aside the Premier's speech and the news release since he largely repeats the same misrepresentations and factual distortions on which the provincial government argument has been built.

Someone has asked for a more dteailed discussion of the deal, I suspect out of concern that Paul Martin has, in a phrase, "sold the shop". Although I'd hesitate to put it in these terms, I'll try and give a federal/provincial scoresheet tomorrow (01 Feb 05) that gives the objectives obtained by each government and at what cost, political or financial.

In general, this agreement represents the structure and principles of the December 22, 2004 offer from the Government of Canada with modifications typical of what is normally achieved in any negotiating process. In general, the principles of the October proposal carry forward into the December proposal; the major difference is the method used to calculate the offset.

In practice, the October formula should have produced the same financial result for the provincial government as this agreement does. The argument on the quantum produced was based solely on the price per barrel of oil, not on the method of calculation. The notion that the October deal was less lucrative than the December proposal is a completely erroneous interpretation by the Government of Newfoundland and Labrador, repeated without question by local news media.

Backgrounder

100% guarantee

Newfoundland and Labrador will receive 100 per cent of our offshore revenues, free from any clawbacks while we are an equalization-receiving province, for the full life of the agreement (subject to meeting conditions of the second eight-year renewal triggers). [Comment: As presented, the provincial government has accepted an offset in the first two years which is actually less than direct revenues. They key aspect of this section is that the offset continues only as long as he province qualifies to receive Equalization; this is definitely not what the province sought and therefore represents a significant gap between goal and result. While the province may resume offsets if it qualifies again for Equalization within the first eight years, this is highly unlikely to occur. If the province no longer qualifies for Equalization in the second eight-year phase, the offsets drop to zero within two years.]

Enhanced protection when off equalization

Newfoundland and Labrador will still receive the full benefits of the protection offered by the Atlantic Accord. The existing Accord's offset mechanism has been extended by one year to cover the full first eight-year term. During the second eight-year term, should the province no longer qualify for equalization in any year, it will receive 66 per cent of the previous year's offset payment in year one and 33 per cent in year two. Should the province requalify for equalization, the 100 per cent offset will be restored. If the province comes off of equalization again within that time frame, the transition is reset. [This is largely a theoretical protection. If the provincial government no longer qualifies for Equalization within the first eight years of this deal, then the declining offset provisions of the original Atlantic Accord apply. Getting rid of the declining offsets was the central part of the original provincial proposal in February 2004. In the most likely scenario, the province will not qualify for Equalization within the next three to five years and therefore will likely not qualify for the second eight-year offset period.]

$2 billion floor

Newfoundland and Labrador will receive an up-front payment of $2 billion (plus interest), which represents a floor on future additional offset payments above and beyond the existing Accord offset payments. This floor essentially protects the province from a decline in oil prices between $30-35US/barrel. In other words, offset payments for the first eight years will be no less than what they would be if the price of oil remains constant between $30-35US/barrel and the level of production remains at the forecasted levels. While minimizing risk to the province, this provision in no way restricts the province's ability to benefit from oil prices above this range. It will also minimize the risk of a steep decline in offset payments in years in which the province no longer qualifies for equalization. [Floor or ceiling? Take your pick. The $2.0 billion is a single amount. The interest noted in this paragraph results solely from an investment of the money received, not an additional transfer from the Government of Canada. If the province spends all $2.0 billion in a week, then it collects little or no interest. In the most likely scenario, oil prices will remain well above US$30 per barrel over the next five years and therefore the provincial government will cease to qualify for Equalization. If oil prices are well above that level, the claim that this in no way restricts the ability to benefit from high prices is misleading. High prices will push the province off Equalization. No offsets will flow under this agreement so the province reverts to the Atlantic Accord benefits (ability to set own revenues). This agreement did not enhance this situation - this is the situation that already exists! The province sets and collects its full share of direct revenues. In the ordinary course, the Equalization program protects provincial governments from steep declines in Equalization. Hence a rapid decline in offsets is simply the loss of one parachute from a two-parachute braking system.

Given the way Premier Williams has referred to this lump sum, it is not clear that the amount will actually be transferred to the provincial government in toto. It would appear that the provincial government is somehow restricted in what it can draw from a fund to be established. It may be that this amount will be deposited in the Canada Offshore Fund account already established to transfer oil revenues collected on behalf of the provincial government by Natural Resources Canada and that the province will be restricted in how much may be drawn down on an annual basis. Only the full text of the agreement and the implementation legislation will make this clear.]

All new projects are included

The benefits of this agreement will apply during the sixteen-year term to any new oil and gas discovery that is developed within its 16-year term, including Hebron-Ben Nevis and yet-to-be-discovered fields in the Orphan Basin, Laurentian Sub-Basin and offshore Labrador. [This provision applies only if the provincial government still qualifies for Equalization and qualifies for the second eight-year offset period. Otherwise, the projects are not covered. In the most likely scenario, they are not offset. This represents a loss from the June 5 agreement and from the December agreement which guaranteed a separate offset for Hebron-Ben Nevis. Bear in mind that the total amount of the cash advance is a little more than double anticipated direct revenues from White Rose. The initial goal was to double the revenues from all four projects. The post-June 10 goal was to double revenues from current and future discoveries.]

Guaranteed payments for 2004-05 and 2005-06

The equalization system is undergoing review on a national basis, with a new system to be established starting in 2006-07. As part of this review, equalization payments for 2004-05 and 2005-06 have already been determined. Therefore, it has also been possible to determine the value of the new offset payments under the Agreement in Principle. For the fiscal year 2004-05, the value of the additional offset payment to provide this 100 per cent offset will be $133.6 million. For the fiscal year 2005-06, the value of the additional offset payment to provide this 100 per cent offset will be $188.7 million. [The value of offset payments under this agreement for the first two years should not be dependent on the amounts already determined for Equalization. The offset is supposed to be based on actual revenues received and operates separate from the Equalization program. in fcat the Accord offsets in the original document are calculated on a 10 province standard. Given that oil prices are much higher and therefore revenues are much higher than forecast, these amounts fall far short of what a genuine 100% offset would be. In practice, though, this section is mooted by the lump sum payment of $2.0 billion. Therefore, it is curious that these specific amounts are highlight. Based on current estimates provincial direct revenues from oil production for Fiscal Year 2004 would be over $300 million, not the $133.6 million suggested here.]

Review mechanism for offset payment calculation

As part of the national review of equalization, the federal government will consider the recommendations of an independent panel and introduce changes to the equalization program starting in 2006-07. Given that the new offset arrangement between Newfoundland and Labrador and the federal government is dependent on the mechanics of the equalization system, our agreement contains a clearly-worded principle on how the 100 per cent obligation will be honoured, in light of any changes to equalization. As well, if the province disagrees with the federal government on how the offset payments have been calculated starting in 2006-07, the province can request that the federal calculations be audited to ensure they are consistent with the 100 per cent principle. [Without the actual wording of the clause, there is no way of assessing the accuracy of this claimed benefit.]

16-year agreement

This agreement ensures that Newfoundland and Labrador will continue to receive 100 per cent of our offshore revenues while we are an equalization-recipient province for 16 years, subject to meeting certain fiscal indicators after the first eight years. The province must receive equalization in 2010-11 or 2011-12, and our per capita debt servicing costs cannot become lower than that of at least four other provinces. These conditions only apply at the end of year eight, to determine whether the second eight-year period will be triggered. [As noted above and elsewhere, in the most likely scenario, the provincial government will cease to qualify for Equalization within the first eight year period. Theoretically, it is a 16 year deal. Theoretically, pigs can fly.]

Review mechanism after 16 years

This agreement provides for a review mechanism after sixteen years. The federal and provincial governments agree that no later than the beginning of the sixteenth year of the agreement, the two levels of government will jointly enter into a review of the agreement. [Any agreement would normally include a "re-opener" clause. Theoretically, as a matter of legal principle, the Upper Churchill contract can be re-opened based on the agreement of the signatories. If one party refuses to amend the agreement, then only a specific clause can force amendment under specified conditions. In practice, if a future Government of Newfoundland and Labrador or Government of Canada refuses to accept the results of a review, then this clause is completely meaningless.]

Most favoured agreement provision

Should the Government of Canada enter into a new offshore petroleum resource revenue agreement with another province or territory that is more beneficial to Newfoundland and Labrador, the province can opt to commence negotiations to revise this agreement. [Grammatically, this paragraph is a nonsense. It is almost impossible to conceive of a situation in which any provincial government would negotiate an agreement that actually proves more beneficial to another province than it does to itself. The Upper Churchill deal is an extremely rare exception, of course. If this clause applied in that instance it would actually apply to Quebec which, of course, wouldn't want to renegotiate a deal from which is all ready "more beneficial". hence the nonsense of the above paragraph. Throughout this entire year of Accord discussions, there is ample evidence that provincial government officials have difficulty communicating effectively in plain English. Either that or Humpty Dumpty works for the Government of Newfoundland and Labrador. 'A word shall mean...']

Paul Martin fixes the Accord, yet again

In the midst of all the Accord spin out there over the past year, it is easy to forget a few simple points:

1. When the provincial government approached John Crosbie on this Accord offset issue in 1990, it was told, in so many words, to "get stuffed". See Paul Wells blog from a couple of days ago for that story. Wells points out, quite rightly, that if any Paul Martin cabinet minister reacted the way Crosbie did, that minister would be on the backbenches so fast it would be unbelievable. It's a bit of a backhanded compliment, Paul, but coming from such an ardent Martin critic, I am sure the PMO would take it!

2. This is the SECOND time Paul Martin has enhanced Equalization offsets in the Atlantic Accord. He did it in 1993/94 and now that he has more cash available, he has delivered on his commitment yet again.

3. The PM has also committed to help the provincial government with other economic development projects, like the Lower Churchill. Go back to last April and you'll see that in local media clippings. All he is waiting on is a contact from the provincial government. He has been waiting for some contact since this time last year. That length of delay on that file is inexplicable. Sheesh, if any Newfoundland and Labrador government in the past had had the PM's personal commitment like that, they surely would not have let it sit untouched this long.

Maybe Bill Rowe could find some time in his cramped schedule and see if he can move that file along.

Don't step in the spin

Alright, let's get this much said right up front so there is no mistake:

There is a deal. It is a good deal. There is more than enough deserved credit to go around.

It's a good deal because it secures extra cash for the provincial treasury. It is a good deal because Danny Williams, unlike some recent politicians hereabouts - Peckford and Tobin to name two - knew when to take the money and run. He could have easily decided to overplay the political hand and, like Tobin and Peckford, cost the province dearly in delayed development.

For Tobin, it was his "teaspoon" crap that was designed solely to keep his personal polling numbers up. Voisey's Bay sat in the ground costing us millions in needed cash although a good deal was attainable before Grimes signed his agreement. For Peckford it was the "ownership" argument that he continued with long after he was advised, soundly advised, that it was a loser of a position. The oil sat in the ground and we lost money in the process, even though a new deal could have been struck to improve whatever could have been signed before 1984 once Mulroney or some other Prime Minister came to office.

Williams could have fallen into the same trap but he didn't. Good for him. He has elected to spend some political capital to sell this deal, even though you can bet your bottom dollar that the Open Line pundits and other negative Nellies will be lining up to point out the obvious - Danny did say yes to less than he sought after June 10. Spending political capital is the make of a serious politican.

Bear in mind, we heard the same sort of people wanting to leave Hibernia oil in the ground in 1990, as The Telegram did, simply because a "perfect" deal wasn't on the table. Politics is the art of the possible, and, as Don Jamieson's memoirs said, it is no place for fools. Fools, in this instance, are the people who struggle for the obviously unattainable and then whine and gripe when they don't get perfection. Danny Williams is no fool, thank God.

That said, there has been a supertanker load of spin spewing from the provincial government and its supporters over the past year about this whole issue. Spin, to put it bluntly, is nothing less than refined bullshit. Be careful you don't step in it.

The Sunday Telegram is brimming with spin today, both in its editorial and in the two front page stories. Undoubtedly there will be yet more this evening and tomorrow as the call-in shows crank back up. People will ignore the federal government's role - specifically Paul Martin's delivery on a commitment to help the province. They'll forget he has waited around for a year for the province to take him up on his offer to help with a project like the Lower Churchill. They'll also have to listen to the people lining up to take credit - unwarranted credit - for this agreement. I already have at least one e-mail of that latter sort.

Let's just take a sample of the spin from George Baker and Danny Williams and shovel it out the door right now.

George Baker, lately of what an old prof of mine used to call the Antechamber to the Kingdom of Heaven - claims Danny Williams is a non-politician. Spin! Williams is a typical local politician. He milked the sense of frustration in the province for all it was worth. He put on a great show for the past three months to earn accolades about being the "only fighting Newfoundlander". He created an artifical crisis - over the Accord and the province's fiscal position - so he could claim credit for fixing it. Alright, so let him enjoy the role of conquering hero led through the gates of the city.

Thereafter follows the second big pat of spin that ultimately makes this exercise a sham. Premier Williams is quoted in The Telegram today talking about restoring confidence in the people of the province, of turning a corner to "have" status. Spin!

What is producing the economic benefit is the very Atlantic Accord Premier Williams so energetically and needlessly trashed these past few months. We will attain "have" province status as a result of oil revenues already flowing as a direct result of the Atlantic Accord. What Danny brought back from Ottawa was some gravy and good on him for doing it.

What will restore confidence, though, is the understanding that this province is NOT poor, that our provincial finances are not in utter disarray. Confidence comes from realising that all the cuts and belt tightening in the early 1990s proved that we, collectively, can sort out our own financial mess and then reap the reward, just as the people of Saskatchewan have done. Confidence comes from realising that even though an old-fashioned spin shoveller can still take power, he didn't last very long once we caught on.

Confidence will be bolstered by looking around and seeing local entrepreneurs taking advantage of the oil industry, building new businesses and competing successfully around the globe for work. Confidence is easy to find in the other entrepreneurs in other industries who are responsible for growth in the economy and job creation apart from the oil business. Confidence comes from realising that while cod are gone - and they are gone, by the way - other fishing is producing new wealth in the province. Local companies are catching and processing local sea products and selling them around the world. FPI is the biggest but there are others.

No one man or woman can restore confidence in this province. As good a guy as Danny is, he is no saviour. We don't need one. Our economic salvation rests in the hands of each person in the province. Would that local news media focused on that for a change; maybe then Margaret Wente and Michale Bliss would have something better to write about. Maybe then, people in other provinces would see what is actually going on down here without having to send guys like Roy MacGregor on high-altitude survey missions in hopes of finding the Lost City of Atlantis.

Danny shouldn't be clamouring for saviour status and he should refuse the label if someone tries to stick a crown on his head. Just as surely as the Atlantic Accord was turned into someone's political give-away myth 20 years after the fact, Danny Williams should recognize that the same people weaving his raiment today for this great deal, have nails and hammer and tree out in the back yard for the next, inevitable phase of the "saviour" story.

It's a good deal Danny and congratulations. Just watch out for the spin.

He said yes to less (revised)

While Premier Danny Williams' supporters will be lauding the agreement on offshore revenues as a triumph, a closer examination reveals something very different.

The following comments are based on the position which Premier Williams stated in 10 June 2004 and which he has maintained as the provincial position until 28 January 2005.

Objective 1: A new offset mechanism delivering to the Government of Newfoundland and Labrador a transfer from the Government of Canada equal to 100% of direct offshore oil and gas revenues, continuing over the life of offshore oil and gas production, irrespective of the provincial government's Equalization entitlement. [Williams to Martin, 10 June 2004]

Note: By current estimates offshore oil and gas production will continue until 2025-2030, or a maximum of 25 years from the current date. This does not include any future discoveries and assumes that the Hebron field will be brought on stream within the next five years.

Shortfall 1: The deal reached with Ottawa is for eight years, with a possible further extension of eight years, for a maximum of 16 years.

Shortfall 2: There is no provision to cover future fields, nor for the extension to the full life of existing offshore oil and gas production. In the conversation with the Prime Minister on 5 June 2004, the Premier had secured "ongoing additional monies available as this goes on into the future and as new fields come on." [Premier Williams, House of Assembly, 7 June 2004]

Objective 2: End the "clawback" of oil and gas revenues under Equalization, for a period of at least eight years (Williams January to 5 June, 2004) and, as the Premier has argued since 05 June 2004, for the life of oil production since "why should we get less than 100% of our revenues after we're equalized?" [Interview with Carol MacNeil, CBC Sunday, 29 October 2004]

Shortfall 3: The current Equalization system continues to apply. If Newfoundland and Labrador no longer qualifies for Equalization within the initial eight year period it receives no added offsets beyond the cash advance, and particularly, if the province is not receiving Equalization between 2010 and 2012, it does not qualify for the second eight year offset period.

Shortfall 4: Under this agreement, once the provincial government no longer qualifies for Equalization, its oil and gas revenues are assessed under the Equalization program as they are currently using the generic solution. (30% shielded from Equalization)

Objective 3: Secure "principle beneficiary" status by amending the existing Atlantic Accord to contain new offset provisions.

Shortfall 5: There will be no amendment to the existing Atlantic Accord under the new arrangement. This is actually not a shortfall, since it secures the agreement against challenges to its current exemption from the North American Free Trade Agreement arising from a redefinition of the strategic objectives of the Accord.

General comments:

* The cash advance of $2.0 billion represents a mid-point between the October estimated value of the offsets based on then-current oil prices and more recent assessments. Fluctuations in the price of oil will affect the cash value of the agreement. It is important to note that the quantum (amount of money) is not as important as the underlying principles on which the money is received. As the above assessment indicates the Premier did not secure any changes to principles but did secure added money, albeit with limitations and restrictions.

* The Telegram story by Rob Antle (Saturday 29 January 2005) contains the comment that this agreement has "no ceiling" on the offsets. This is incorrect. The offsets are very clearly capped based on the provincial government's Equalization status. If oil prices remain at high levels over the next eight years, the provincial government will no longer qualify for Equalization. Thus the total offset amount will remain at $2.0 billion and will not increase.

The cash advance effectively forestalls a cut-off of offsets that would likely occur as the province moves to the point where it no longer qualifies for Equalization.

* The cash advance represents approximately $500 million more than the total provincial direct revenues from the White Rose project alone. That is, based on current oil prices and extrapolating from the 2001 Strategic Concepts assessment, the provincial government direct revenues for White Rose will be approximately $1.5 billion. The cash advance actually doubles the total revenues from that single project plus a small amount in addition.

It does not achieve the original objective of doubling revenues from all projects.