Monday, July 24, 2006

Voters Deserve Better

(Previously published in the Telegram, November, 2005)

Electoral systems are always in a state of change. Most reforms produce real advantages. Others seem like a good idea at the time, but can introduce real problems that are only obvious after implementation. The St. John's municipal mail-in ballot system (MIB) is one of those.

MIB was introduced four years ago by City Council as a way to increase turnout and save money. However, the last two elections have shown that the St. John's municipal MIB has failed in its primary objective and has introduced new problems.

First, MIB has done little or nothing to improve turnout. The most recent election turnout was marginally lower than for the previous (2001), which used a combination of traditional ballots and MIB. 2001 was on par with 1997, which used traditional ballots only.

Some research even shows has shown that MIB may actually cause a lower turnout. Patricia Funk, an economist studying the Swiss electoral system, has found that MIB systems have actually reduced turnouts in elections she's examined.

Voting is a very complex behavior, with turnout dependent on many factors - the kinds of ballots used is only a minor one. Clearly, if low turnout is the problem, then MIB is not the solution.

Second, the system as adopted by the city is ripe for campaign fraud. By contrast with the city's MIB procedures, federal and provincial electoral systems use the voter list as a starting point and then impose safeguards at the ballot box to ensure each vote is legitimate. Instead, the city simply mailed ballots to every name on their revised list and neglected to perform the most elementary checks.

Was the voter still in the city, province, country - or even alive? Did the returned ballot actually come from the voter and not a neighbor or an over-zealous campaign worker? Without the checks and safeguards used in other electoral systems, there was no way of knowing, and the didn't try to find out.

So the media reported on abandoned ballot forms stacked up like old Pipers flyers in apartment building lobbies, and households received ballots for people long moved out. Little wonder the Florida Department of Law Enforcement has referred to MIB as "the tool of choice for those inclined to commit voter fraud."

Council has cited Oregon as an example of another jurisdiction effectively using MIB. Well, the heart of the Oregon system is a verification of ballot authenticity by comparing the voter signature on the ballot with the sample of the voter's signature already on file.

That's not done here. All Oregon and St. John's have in common is using the mail to deliver ballots, and that's not enough.

Finally, there's the matter of timing. Ballots were mailed out September 9, with the majority returned within a week. This effectively pushed ahead the election date by 10 days and made the campaign much shorter than in any other municipality in the province. This protected incumbents at the expense of new voices, and left voters with little time to assess all the candidates and their positions.

Many voters who sent their ballots in early had second thoughts as the campaign wore on and they learned more about the candidates - but had no recourse.

The city claims that $100,000 per election is saved through MIB. With an election every four years, that means a purported saving of only $25,000 a year - or less than 0.017% of the annual budget. Under the circumstances, that's penny wise and pound foolish.

In the end, the mail-in ballot system introduced new problems, protected incumbents and enfranchised the dead; it's time to go back.


Since this was published almost a year ago, the City of St. John's has continued to refuse to make any substantial changes to the mail-in ballot. It looks like the systemic deficiencies which came to light in 2005 will repeated in 2009.

Friday, July 21, 2006

We can learn from Japan

Japan has a political party that this province's parties can learn from. It's called the New Komeito (Japanese: 公明党, Kōmeitō) or NKP.

It's also popularly known as the "New Clean Government Party".

Although it's gone through many incarnations over the years, several important aspects have remained constant.

One is that the party's base philosophy is founded on Buddhist principles. That might sound exceptional but it's not that unusual; many parties around the world are based on religious principles. Several western European parties are rooted in Christian ideas and some are more specifically Catholic based.

Even in North America, one could easily argue that the US Republican Party and some branches of the Canadian Conservative Party are Christian parties. Even the NDP predecessor party, the CCF, was founded on Methodist social gospel ideals.

None of this means that these are theocratic parties and the New Komeito is not a theocratic party. It just means that they derive their political foundations from a particular set of religious ideals.

However, that's not what makes this party interesting to us here in NL.

What makes this party relevant to our province is their policy platform. It includes the reduction of the power of central government and bureaucracy, an increased role for the private sector and increased transparency in public affairs.

In a country where money politics rule, where under-the-table fat envelopes of cash buys influence, where politicians funnel money into favored communities, groups and individuals and where wasteful government public works projects are conceived and executed exclusively for political ends, this party stands as a beacon for political ethics and clean government in Japan.

The first point of manifesto, and their basic reason for existence, reads in part:

"Towards Better Government: Sweeping reforms to government, public spending, rooting out political corruption.

... Parliamentary politics is founded on ethical political conduct. Yet a seemingly endless procession of scandals involving politicians and their corrosive dependence on money has occurred in Japan for years, resulting in a debilitating loss in public trust and confidence. New Komeito has long taken the lead in political reform, and we pledge to continue waging our battle against political corruption in order to rid Japanese politics of its tainted legacy. Moreover, we declare war on all outdated political privileges, seeking to end unnecessary entitlements for legislators."
The New Komeito actually believes in these principles and they do what they can to promote them. As a member of a government coalition, they work these ideals into government policy. When in opposition, they do what they can to force government to respect these ideas.

This is a party for whom openness, transparency and accountability are more than just empty words tacked onto the end of the government news release to justify doing exactly what government plans to do anyway.

That's a significant difference from parties which revere political expediency. You know the kind: they defend of grossly inappropriate actions, they stonewall calls for outside investigation into questionable activities, they clamp down on the release of information to the public and generally prefer to "manage the issue" instead of confronting the problem at hand.

I guess that's the difference a sound ethical foundation makes.

There is no local provincial equivalent to the New Komeito or Clean Government Party.

And it shows.

Thursday, July 20, 2006

Caught in the Middle - Complete

Regular readers of this blog will know that Atlantic Business Magazine (a fine publication - pick it up today) commissioned me to write an analysis of the Hebron Ben-Nevis negotiations between the provincial government and the operator consortium led by Chevron.

So far I've posted it in bits and peices (it's almost 6000 words) but due to popular demand, here's the whole works in one place including a bonus and previously unpublished blow-out box on the CNLOPB chair contraversy

It's called Caught in the Middle*.

Enjoy. . . and feel free to let me know what you think.

* If I had had my way I would have called it Hebron - Not One Teaspoon, a reference to Premier Brian Tobin's famous remark during the Voisey Bay nickel negotiations which sunk any chance of him ever signing a deal because, politically, he raised the bar so impossibly high. Whether Premier Williams has done the same on Hebron is something we'll only understand with the passage of time.


The Stage Is Set

On October 21, 2003, Danny Williams was elected Premier of Newfoundland and Labrador. Taking 34 of 48 seats, he swept out the Liberal government that had been in place for 15 years.

Speaking to supporters that night, he was unequivocal about the approach he would take to resource development: “My team has received a mandate to seize control of our own destiny,” he said, “the giveaways end right here and right now.”

It’s likely that those remarks were little noted in the global headquarters of major oil companies, half a continent away. It would have been hard to predict then what William’s declaration would mean for a prospective project that could be the fourth development offshore Newfoundland, maintaining the momentum of an industry that has fueled the province’s economic growth for the past decade.

Yet thirty months later, negotiations between the operator and government on the much-anticipated Hebron development were suddenly suspended for an indefinite period.

What happened?

The Prize

The Hebron field was discovered in 1981, some 350 km southeast of St. John’s in Newfoundland’s oil-rich Jeanne d’Arc Basin. The discovery license is held by a consortium of Chevron Canada Resources (28%), ExxonMobil Canada (38%), Petro Canada (24%) and Norsk Hydro Canada Oil & Gas (10%).

The Hebron complex comprises three formations - Hebron, Ben Nevis and West Ben Nevis. Long estimated at 400-700 million barrels, in June 2006 Hebron’s proven and probable oil resources were pegged at 731 million barrels by the Canada-Newfoundland and Labrador Offshore Petroleum Board (CNLOPB), making Hebron the region’s second largest oil resource after Hibernia.

However, size isn’t everything.

Unlike the light, sweet crude of Hibernia, Terra Nova and White Rose, Hebron oil is predominantly heavy and thick, more difficult to produce in the cold North Atlantic environment.

Typically, oil production is aided by the force of natural gas present in the reservoir; Newfoundland’s three current projects have been able to take advantage of abundant associated gas. However, Hebron, which requires more pressure to lift its molasses-like crude, actually has less. To compensate, many more injection wells (through which water and gas are forced into the reservoir) will have to be drilled in the Hebron field, driving up costs along with the oil.

Compounding this issue is Hebron’s problematic reservoir structure. The lower quality oil is located in easy-to-access areas while the better oil is located in more fractured formations. Extensive horizontal drilling will be required, reaching out more than two kilometers from the drill site.

All together, the 40 or so injection and production wells needed to deplete the field will cost over a billion dollars - far higher than the other three projects.

These and other technical considerations have led the consortium to select a gravity base structure (GBS) as the preferred development option. At about two-thirds the size of the Hibernia GBS, with one rather than two drill shafts, the Hebron structure remains an expensive option in a global market that currently favours FPSOs.

The rate at which the oil flows is also an issue. Flow rate depends in part on the permeability of the rock in which the oil is trapped. While Hibernia’s porous source rock is in the range of two to three darcies, the much tighter sandstone of the Hebron reservoirs are closer to .03 to .04 darcies.

Finally, there is the question of refining and marketing. Hebron’s heavy oil is higher in impurities such as sulfur, metals and acid, and more expensive to refine. Therefore, it will sell at a discount of up to 30%, compared to typical light, sweet Grand Banks crude.

Historically, because of these geological and petrochemical realities, Hebron Ben Nevis has been considered a marginal field. According to Wood Mackenzie, an international consulting firm and respected adviser to the energy industry for over 30 years, it is a “high risk and low yield project” with a higher cost per barrel of recoverable oil than any of the other three Grand Banks projects.

On initial assessment, Hebron was judged non commercial. Its potential was raised after promising results from three appraisal wells, drilled in 1999 – 2000. Yet after an intensive two-year evaluation, in February 2002 the field was still considered too challenging, too difficult and just too expensive to develop using existing technology.

It was not until 2004, when field operator Chevron hired a project manager and opened an office in St. John’s, that development looked likely to happen. In April 2005 the Hebron consortium signed a Joint Operating Agreement to again evaluate the project.

Time had made the project viable. New technologies and skyrocketing oil prices brought Hebron to the point of development and the consortium to the negotiating table with government. By mutual agreement, a negotiating deadline was set for April 2006.

The Negotiations

Neither side has fully revealed their negotiating positions, nor provided an account of how the negotiations unfolded, despite requests from stakeholders.

The development consortium has left public statements to their lead negotiator, Chevron. Chevron’s primary spokesperson, Mark MacLeod, steers away from a detailed dissection of the negotiations in favor of more general comment. Government has provided a little more substantive information, but far from all.

But from remarks made in the media and the legislature, a rough picture starts to emerge of a very ambitious set of negotiating aims.

True to his election-night promise, Premier Danny Williams and his ministers have repeated the theme that they will ‘leave the oil in the ground’ rather than risk Hebron becoming yet another “provincial government give-away”. This message was repeated at the start, the middle and at the climax of the negotiation collapse.

In April 2005 Williams put the consortium on notice that the province would aggressively negotiate for enhanced local benefits. He offered the option of fulfilling any two of three provincial demands: richer royalties than outlined in the generic regime, a provincial equity stake in the project or a new oil refinery for the province. The latter option introduced downstream processing for the first time as a meaningful element of any petroleum project negotiations.

In February 2006, Newfoundland and Labrador Refining Corporation announced their intent to commission a feasibility study for a 300,000 bopd refinery (three times the capacity of Come by Chance) in Placentia Bay. At that point Premier Williams dropped the refinery demand out of the negotiation mix.

That left the other two demands: equity and better royalties.

In October 2005, Premier Williams had suggested that Newfoundland Hydro, the crown corporation electrical generation and distribution utility, might be interested in taking an equity stake in any new oil projects.

The consortium agreed to a Tier III super-royalty that would bring higher returns to the provincial treasury as long as the price of oil stayed above $50 per barrel. The consortium negotiators felt that they had offered Newfoundland and Labrador the best local benefits arrangement of any project to date.

But government was after a deal that was fundamentally different from those concluded on the three previous oil projects. They wanted an equity stake. Government negotiators initially sought a 8.5 to 10% interest, but lowered the demand to 4.9% - below the threshold for a seat at the management table.

Government’s persistence regarding project equity took the companies by surprise. The issue traveled up the partners’ respective chains of command.

Chevron spokesperson Mark MacLeod confirms, “"We did give equity consideration at the highest levels of our respective organizations, but unfortunately gaps remained at the end of the day.”

Exactly how the negotiations broke down is murky, as different players highlight different issues. One stumbling block seems to be a late request from the consortium, rejected by government on principle, for investment tax credits and a tax rebate on all fuel used during project development. Another is the consortium’s reluctance to grant the province an equity stake – apparently a deal-breaker for ExxonMobil in particular.

On Friday, April 1, 2006, government advised that an announcement on the conclusions of the Hebron negotiations would be made on Monday.

Newfoundland and Labrador – Energy Warehouse

An important theme at play around the Hebron negotiations has been government‘s vision of the province as an “energy warehouse”.

While that vision is still evolving, the long-awaited provincial energy plan (due for release later this year) is expected to provide some definition. It has been described by the Premier as “a clearly defined plan for the future [to] identify the best policy direction for the development and use of our province’s resources [and] the most aggressive and comprehensive energy policy review and development ever undertaken in this province.”

Government has already indicated that the lead management role will lie with Newfoundland and Labrador Hydro (NLH). Both the Premier and provincial Natural Resources Minister Ed Byrne have cited Norway’s Norsk Hydro as the preferred model.

Shortly before the breakdown of negotiations, Minister Byrne hinted at the future role of NLH as an energy player: “That’s a public policy position we’ve laid down that as a province - we’d like to have some equity stake in the emerging oil and gas industry - not unlike what’s happened in Norway, not unlike what’s happened in other jurisdictions in the world.”

However, while the provincial government cites Norway as a model for its involvement in energy industries, it has been very selective in what elements to adopt - even as Norway itself has inched away from the original model they established.

Successive Norwegian governments have sold, or announced an intention to sell, parts of the state’s ownership interest. This divestiture accelerated over the past decade, even under Labour-led administrations. Today, the government of Norway owns only a minority stake (43.8%).

Norsk Hydro operates at arms-length from the government, which has typically attempted little or no direct control of this state corporation. Eivind Reiten, President and Chief Executive Officer of Norsk Hydro since 2001, has noted that while government appoints board members, they are selected on business, rather than political or policy criteria. Reiten says that “It is hard to think of a country where the state has been so passive a stakeholder.”

Norsk Hydro is often held up as a good example of state-owned, rather than state-directed, capitalism.

By contrast, NLH has long functioned as a branch of government. In recent years, major decisions on business initiatives (such as the EOI process on the Lower Churchill) have been driven by, and announced through, the Premier’s office. The Premier also selects senior NLH executives: on the appointment of CEO Ed Martin, NLH Chair Dean MacDonald merely “indicated the board of director’s full endorsement of Mr. Martin and joined the premier and minister in welcoming him to Hydro.”

This integration of NLH with government has been made even tighter through two strategic legislative amendments. As of May 2006, NLH was empowered to “engage in activities related to the exploration for, development, production, refining, marketing and transportation of, hydrocarbons and products from hydrocarbons” and “other activities that the Lieutenant-Governor in Council may approve” – in other words, any other activities Cabinet directs.

The provincial government has explicitly stated its intent to use NLH as a tool to implement government policy, expecting the company to “contribute significantly to assisting government implement the Energy Plan once it has been developed.”

Peter Fenwick, Research Fellow with the Atlantic Institute for Market Studies and former leader of the New Democratic Party of Newfoundland and Labrador, argues that “while it would be an example of economic lunacy for a government to buy back into an oil company when most jurisdictions in the world are moving in the opposite direction, the greatest harm is done by the huge red flag the attempt at extortion raises for all the other oil companies who might want to invest in Newfoundland’s offshore.”

Whatever outside models for state energy corporations the Williams government may be following, Norsk Hydro is not one of them.

After the Breakdown

On Monday April 3, after a weekend of anticipation in the local petroleum supply and service sector and in the wider business community, Williams publicly advised the province that Hebron negotiations had broken down

There was, and continues to be, no shortage of strong opinions both for and against William’s negotiating stance. Public rhetoric immediately ran high and straw polls showed 77% in favour of “leaving it in the ground”.

The Premier aimed fire at ExxonMobil in particular, chastising them for their intransigence. His position was clear: “Get out of Dodge and go somewhere else. But give us an opportunity to develop this. We will take you out. We are going to have to find a way to legislate you out because we are not going to allow a company like ExxonMobil or anybody else hold up these reserves indefinitely.”

One important issue raised by all sides, once it was clear the negotiations had collapsed, was the overall lack of clarity and confidence in the rules of the game.

Chevron’s MacLeod has repeatedly cited lack of certainty as an impediment to the negotiations, with particular reference to the unprecedented demand for the equity stake: “We as an industry need stability and certainty in the regulations, and this was not one of the things that was envisioned from the beginning, or until recently.”

Paul Barnes, manager of Atlantic Canadian operations for the Canadian Association of Petroleum Producers (CAPP), expressed a broader industry concern. He noted that the industry was “trying to understand the investment climate here in the province. Is it as good as it once was or is it starting to deteriorate? They’re taking all that into account before they take future investment decisions.”

John Lau, the chief executive of Husky Energy Inc., one the region's top oil producers through the White Rose development, said they were reluctant to move forward with investment decisions until it understands the rules. "I am working with the government to clarify a lot of points," Mr. Lau said after the company's annual shareholders' meeting. "I feel Newfoundland needs to look at their policy on how to facilitate employment and keep the people there, and more important, how to facilitate opportunity for business to do business in Newfoundland ... We will wait until the government spells all the tax issues, the royalty regime, the equity participation, and also the tenure of the leases."

Don Drummond, Senior Vice President and Chief Economist of the TD Bank Financial Group, concurred: “The government must be very mindful that clear and transparent ground rules are absolutely critical to success in an industry where investments are long terms and risks are high.”

Speaking for the offshore petroleum support sector, Ted Howell, President and CEO of the Newfoundland Ocean Industries Association (NOIA) says that certainty is also an issue for them. "NOIA members need stability and predictability, too. Businesses, large and small, need to know when to invest and what to invest in," says Howell. "It's also a very important human resource issue: our members need predictability to make staffing decisions. The smaller home grown companies need continuity of work to keep their staff. The global supply and service need a reason to stay and keep their staff here."

Premier Williams himself responded by agreeing that it was a “fair comment, absolutely” for the industry to want clarity, but went on to speak of the matter only in terms of a forthcoming natural gas royalty regime, due for release at the end of 2006.

But the ground rules for Hebron negotiations were not up for discussion.

In the days that followed, Williams spoke of possible actions to advance the talks: buy-out (or outright expropriation) of ExxonMobil’s share in the project and introduction of fallow-field legislation.

Unfortunately for the Premier, his initial preferred options were easier said than done.

As government tried to take control of the situation and force action by the consortium, their predicament became apparent; while government can stop a development it doesn’t like, there is very little government can do to force one to proceed. The only real tool at government’s disposal is a veto power.

The consortium, too, has a veto: they can shelve development plans when the conditions are not acceptable to them. Both sides have brakes, but neither has an accelerator.

Since neither government nor the consortium could force the project ahead over the objections of the other, a stand-off developed.

Williams made clear that he saw ExxonMobil as the chief impediment to a deal so he looked to remove the oil giant from the equation, through third-party purchase or expropriation.

However, the province cannot expropriate a resource that is not under its jurisdiction. Despite popular belief in provincial ownership, in the 1980s the Supreme Court definitively established that the offshore resource lies under federal jurisdiction. The Atlantic Accord was negotiated in 1985 to put aside the matter of ownership and allow the province to tax and otherwise manage the resource so that it would be the primary beneficiary.

But the federal government never gave up jurisdiction, ownership or management of the resource in any other way.

Therefore, without federal consent and action, the province could neither expropriate nor force a sale of ExxonMobil’s share of the project. And even if the federal government agreed to expropriate, trade experts warned that any such move could cost billions and would virtually guarantee a mammoth lawsuit from ExxonMobil, under the provisions of the North American Free Trade Agreement (NAFTA).

As NAFTA law specialist Todd Weiler stated, “This would be the most blatant example of regulatory confiscation since the NAFTA was negotiated."

As an alternative, the Williams government turned to the option of enacting fallow field legislation to force ExxonMobil and other putatively recalcitrant licence holders to “use it or lose it”. In simple terms, such legislation would require a company holding a significant discovery to develop within a specified time frame or relinquish the licence.

Currently, significant discovery licences (SDLs) are granted in perpetuity. In theory, Chevron, ExxonMobil and the other partners could sit on Hebron indefinitely, never developing it themselves and never letting anyone else develop it either.

Newfoundland and Labrador’s Minister of Natural Resources, Ed Byrne, has already suggest the partners are doing just that, having held the discovery, undeveloped, since 1981. Making the public case for fallow field legislation, Byrne has also referenced Labrador gas, a resource that development has similarly stalled.

Byrne’s comments prompted immediate response. Industry pointed out that a quarter century of technology and economic change have made Hebron development viable. Privately they also point out that, in the case of Labrador gas, a major impediment has been government’s reluctance, under three different Premiers, to release a natural gas royalty regime after more than a decade of internal work and outside consultations.

And while petroleum companies indicated grudging acceptance of fallow field legislation on a go-forward basis, they considered retroactive application as another example of regulatory uncertainty, as the rules of the game would be changed during play.

A further wrinkle in the fallow field approach lay in the fact that changing licensing arrangements also requires the active cooperation of the federal government – in this case, a newly elected minority Conservative government with strong roots in the West and the oil sector.

Stephen Harper showed an adroitness and political agility that belied his status as a newly minted Prime Minister. He treated the Hebron issue as a strictly commercial dispute, to be settled though negotiation. Scrummed by the media, he refused to take sides, stating instead that “We’ve learned in the past that it’s best to keep a stable investment climate in the oil and gas business, and that’s the general approach that the government of Canada will take ... I think it’s important that we respect any property rights and we make sure anything we do doesn’t expose the Government of Canada or the taxpayers of Canada to significant liabilities.”

The only remaining route for Williams was to send a letter to ExxonMobil, seeking to buy out their project share.

They declined.

Economic Impact and Business Response

The collapse of the Hebron negotiations is not a mere abstract political dispute. For thousands of people and hundreds of businesses across the province, Hebron represents continued employment or corporate survival. A potential Hebron is part of a larger provincial oil and gas industry that has had, and continues to have, a profound economic impact.

Memorial University economics professor Wade Locke has studied the industry for both oil companies and government. He believes that provincial government revenues could reach $10 billion over the life of the project, not including the economic activity generated by the development costs of $3 to $5 billion. Locke notes that Hebron would be worth more in economic terms than Hibernia, White Rose and Terra Nova combined.

Naturally, the business community has had something to say about the collapse of negotiations. First off the mark was the offshore supply and service sector.

NOIA has stated unequivocally that without Hebron the industry will stall. NOIA members foresee “reduced business opportunity [and] reduced employment”, and a pressing need to seek other markets. The association speaks in business-like, forward-looking terms about “re-tooling for export, re-locating, re-deploying resources and workforce elsewhere”. But the meaning is clear and concerning: less business and fewer jobs in Newfoundland and Labrador.

NOIA represents companies that have invested over 20 or 30 years to establish petroleum supply and service infrastructure and capability - both facilities and human resources - which must be maintained and paid for.

This makes the situation more acute than the oil negotiation wars of the 1990s. Back then, a delay in development represented an opportunity cost in work and profit. These days, continued development means maintaining real jobs for thousands of people and real profits collectively in the millions.

Take the example of A. Harvey and Co. of St. John's who runs the main supply base serving Newfoundland's offshore installations. General Manager Geoff Cunningham says that the company recently completed a $12 million facilities expansion by adding three supply vessel berths including a heavy lift crane pad to accommodate Hebron operations and other opportunities. This is the kind of up front costs that the local companies have had to undertake to capture business opportunities.

A gap in development projects now represents a potential shrinkage in the existing supporting industries.

That point was made by supply and service veteran Harry Pride of Blue Water Agencies. Pride said the lack of a Hebron deal has “destroyed an industry that would give us 20, 25 years work ... We would have had 3000 workers here - they’re all going somewhere else. People know that their career is going to be very short here so now they’re all on the internet looking for a longer career. And they’re welcomed like anything out west.”

Pride’s 20-25 years refers to the probable lifespan of the Hebron project, from development through production to decommissioning. The 3000 workers is a rough but generally accepted estimate of the construction, fabrication and ancillary support workforce likely to be deployed in the province during the project’s three-year development period.

NOIA estimates 3300 workers active for 36 months.

The scope of this potential economic loss has motivated other organizations to publicly call on both sides to resume negotiations.

On May 19, 2006, the St. John's Board of Trade wrote to the Province and Chevron seeking clarification of their positions on development of Hebron Ben Nevis. Board President Ray Dillon said that they wanted to get a better sense of what the two sides are looking for and, in his view, there is no better time for development than now. He said a lot of companies had already made significant investments in anticipation of the project.

This correspondence followed on another call to get the two sides back to the table. The Professional Engineers and Geoscientists of Newfoundland and Labrador (PEGNL) highlighted the importance of maintaining industry momentum and providing continuity. PEGNL Executive Director Steve MacLean argued, “we’ve seen right from the beginning with Hibernia through now, that there is a lack of continuity - sort of a quasi boom-and-bust scenario. And the only way for us to build a sustainable resource here for the development of oil and gas is to see continuity in the projects from one to another.”

He concluded that “We are going to see not only a loss of continued development of expertise in the oil and gas sectors, but we’re also seeing some of the people we’ve already trained and had gathered experience over the years moving elsewhere and being lost to our economy.”

PEGNL’s remarks dovetailed with NOIA’s position. A “next project” can provide opportunity, through location of the maximum possible front end engineering design (FEED) and detailed engineering in the province, to increase resident expertise, encourage technology transfer and expand home-grown supply and service capability.

NOIA's Ted Howell says that development phase opportunities for the local supply and service community include, in addition to supply and support contracts during drilling and other activity at the offshore site, major engineering, construction and commissioning work on the proposed Hebron GBS and its topsides components. "This could keep our fabrication sites humming for at least three years," says Howell.

"It may be easy to forget or minimize the economic benefit of Hibernia, since most work occurred outside the major population centres on the Northeast Avalon, out of sight and out of mind. But I was there at Bull Arm and Marystown. It would be hard to overestimate the energy Hibernia injected into those rural areas and their economies."

Howell is quick to point out that contract and employment benefits continue throughout the production stage: "Every component that is built and installed has to be operated, maintained, tested, repaired and maybe replaced over the 20 year life of the field, which represents extensive long term opportunity."

More broadly is the effect on general economic activity within the province.

An independent study conducted by Memorial University socio-economist Dr. Mark Shrimpton for Petroleum Research Atlantic Canada (PRAC) in December 2005 outlines the degree to which the provincial economy has become dependent on ongoing oil production and future developments.

In 2004 the oil and gas industry represented an astounding 24% of the province’s $3.8 billion GDP. It employed 17,300 people in development and production jobs, as well as spinoff work. Shrimpton credits oil and gas activity with lowering the overall employment rate by 3.1%.

In a provincial economy battered by crises in the fisheries and forest industries, oil stands out as a stable source of revenue and employment.

Drummond summarizes it this way: “Since 1998, for example, the province has recorded spectacular economic growth of 5% a year - a rate unrivaled among the provinces. The oil sector contributed 10% of economic activity over this period. At the same time, the oil offshore activity boosted employment and personal disposable income by about 6% per year on average. Oil production also translates into hundreds of millions of dollars in tax revenues for the Newfoundland and Labrador government through the royalty regime, which in turn supports public programs.”

Overall, the oil sector now contributes approximately 16% to provincial GDP and almost $1 billion (about a fifth of total) to provincial revenues. Part of this vast contribution owes to rising oil prices and part to steadily increasing production.

However, a change is coming, soon.

It goes without saying that oil is a non-renewable resource. What is generally less recognized is that it won’t be long before Newfoundland’s existing offshore projects exhaust their supply.

Oil production from Hibernia, White Rose and Terra Nova will peak toward the end of the decade and then drop off soon thereafter. With oil prices staying roughly level, government can expect to see a precipitous decline in royalty revenue, starting around 2011 or 2012.

Wade Locke warns of the impending fiscal contraction: “All one needs to look at is the royalty and tax revenue forecast from the three offshore projects (Hibernia, Terra Nova, White Rose) to see that in 4-5 years the offshore revenue is down substantially.”

If a deal had been made on Hebron, industry and independent projections including Wood Mackenzie, show a much slower and longer decline in both production and revenue. As things stand now, by 2011 or so government revenues will be reduced to one half to one third of current and then slow to a trickle by 2018.

Plan B - What Happens Now?

The high tempers and intemperate rhetoric have cooled in the months since Hebron negotiations stalled. Even public sentiment indicates s new moderation: a May 2006 talk-radio-sponsored internet straw poll (with an impressive response rate of over 6000) showed 55% in favour of re-opening project negotiations.

Petro-Canada head Ron Brenneman holds out hope for Hebron. Fundamentally, he argues, Hebron is a very good project, in shallow water, well within reach of existing infrastructure. As for timing, “How soon can that be? We’re not talking about weeks or months here. We’re probably talking about several months at the soonest, if we were to reach an agreement.”

“At this point, there are no negotiations ongoing, so you have to expect this is at least a year, perhaps more, off into the future,” he says.

As for Chevron, Macleod also remains optimistic that the project will go ahead at some future point. He believes the most appropriate way to look at this time, after the heat of the negotiation breakdown, is as a cooling period.

Government has maintained from the day talks broke off that the door is open for resumption of negotiations. The question is, is there anyone left to talk to? As Fenwick wryly notes, “There’s a price to be paid for changing the rules - often people refuse to play at all.”

There is reason to be concerned. Absent a Hebron agreement, Chevron and its partners are moving on and deploying their staff world-wide.

Hebron project manager Richard Eldridge and senior engineering manager Colin McNeilly left the province just four days after Chevron announced the suspension of talks.

Mark MacLeod has said it would take at least two years to rebuild the 60 person project team a third of whom are Newfoundlanders - and that it would not even consider doing so until it the fiscal terms of the project were put to bed.

"We've put things in motion at this point that cannot be undone," says Chevron Canada vice president James Bates.

As long as there are more potential projects than there are qualified people and capital to exploit them, this project will now have to compete for both with other projects around the world. There’s a global high demand for oil-related capital and qualified people.

Newfoundland and Labrador, sensitized by the disastrously one-sided Upper Churchill hydro development agreement, is justifiably reluctant to sign any deal that may be another resource “giveaway”. In other provinces, resource development is simply an economic issue. In Newfoundland and Labrador, resource development is a matter of provincial pride heightened by a desperate determination not to be swindled again.

That means substantial public sentiment in favor of ‘leaving it in the ground’ rather than risking a deal. Provincial politicians have learned to ignore that sentiment at their peril.

But as Brian Lee Crawley, President of the Atlantic Institute of Market Studies, observes: “Natural resources left in the ground do not appreciate - they lose value. In other words, we cannot leave our oil and gas in the ground, confident that its value will increase. We cannot afford to forgo development that doesn’t meet our terms, confident that companies will beg us later to develop it at a better price. In fact, the long term trend in the value of natural resources, including oil and gas, is down, not up, once you filter out the short term gyrations around the mean, and this has been true literally for centuries.”

What form this project might take in the future is anybody’s guess. Since its discovery 25 years ago, Hebron has gone from uneconomical to marginal to worth spending up to $5 billion on a GBS to develop and generating $10 billion in royalties.

That’s the difference made by a quarter century of oil price rises and technology advancements.

There’s already speculation among offshore technologists that, if and when the project goes forward in the future, it might take a totally different form. Rather than another massive concrete GBS, the oil might just be piped back to the existing Hibernia platform, thus avoiding some of the huge up-front development costs.

That would mean a lesser development benefits package for the province, of course. Less fabrication and construction, less employment, fewer contracts for the local supply and service community.

But that’s the long game.

Here and now, Ted Hollett says NOIA members are revising their budgets and dropping potential Hebron contracts out of their near-term business and employment plans.

Premier Williams says “'As long as I'm in this job, we'll maintain this position.”

Meanwhile the MacLeod family is awaiting the end of the school year before finalizing their moving plans.

Coda - CNLOPB Chair Tussle

A side story to the larger Hebron drama has been the ongoing standoff between the federal and provincial governments over the Chairmanship of the Canada-Newfound and Labrador Offshore Petroleum Board (CNLOPB).

This quasi-judicial body, established under the Atlantic Accord, manages the petroleum resources in the Newfoundland and Labrador offshore area on behalf of federal and provincial governments. It wields enormous influence in the way developments proceed.

The Chair and CEO is appointed jointly by both governments, after an official executive search.

In July 2005, the province short-circuited the ongoing search process by supporting the appointment of a late-coming candidate, St. John’s Mayor Andy Wells. Wells is a colorful and controversial career politician, with a penchant for bare-knuckles politics and blunt comment.

The federal government, under both Martin and Harper, has resisted Wells’ appointment. Martin initiated and Harper endorsed a binding third-party appointment process available to either side under the Atlantic Accord. Headed by prominent businessman Harry Steele, the panel recommended the appointment of Max Ruelokke, a well respected engineer with extensive senior public sector and industry experience.

The federal government has initiated the paperwork to make the appointment official, while the province has dragged its feet arguing for splitting the position into a separate Chair and CEO to achieve better governance.

Ruelokke has announced he’s taking the province to court. He’s seeking a writ compelling the provincial cabinet to authorize his appointment.

The provincial government has no comment while the case is in litigation.

Wednesday, July 19, 2006

Lunar Landing 1969

Thirty-seven years ago on July 20, 1969, billions of people around the globe stopped what they were doing and watched as a test pilot from Ohio walked on the moon. He was followed by his fellow travelers Buzz Aldrin. Michael Collins stayed behind in orbit to man the fort, watching from above.

After that we could never look at ourselves in the same way again. We had, for the first time ever in human evolution, stepped on a place where truly no person had stepped before.

This is what they saw.

Moon Landing Week

I am a child of the space age.

I remember as a boy of 6 years watching the space launches; moon landing and walks; and the final splashdowns. For years after I built and flew rockets as a hobby. I still build them today and I look forward to going out with my kids and launching them on a clear and windless day (good luck with that in the great St. John's area).

On this one thing only I agree with George Bush - our place is out there.

Here's a few more images from this NASA library. Just to provide some sense of scale: the Saturn V you see here was roughly 365 feet tall, a little more than 3 times the height of the Confederation Building in St. John's.

1969: Apollo 11 on the way

37 years ago tonight the top of this 365 foot marvel was travelling at roughly 25,000 mph on the way to the moon with three men on board; tomorrow they will land. Then they will be brought back safely after 5 days on the moon and in space.

This was a defining moment for mankind. I think we should all be amazed that this actually happened.

Thursday, July 13, 2006

New-Lab fixed link

We haven't heard anything on the tunnel issue since the province let it fall off the radar screen we had to endure too much fanfare from the highest political levels of government.

This article from Worldwide is as good a reason as any why that was a wise move.

Picking fights - I

No doubt much will be written over the next few days about Premier Williams' release and newser reigniting the war with ExxonMobil among other things - there was an awful number of issues tossed out in the release, scrum and associated news interviews.

For the sake of clarity I'll just deal with a few of Williams' charges.

1) "Max Ruelokke is an untrustworthy oil industry shill." (my paraphrase)

I won't belabor this one. Today's Telegram nailed this charge to the wall (reproduced at Bond Papers) further reinforced by the Bond Paper's own commentary so enough said on that.

In any case Judge Halley will have the last word unless the province decides to push the matter to the wall in appeal.

2) "When Alberta wants more royalties, it's ok. But when NL does, it's a grab". (or words to that effect)

I follow this issue pretty closely and I never heard that Alberta was looking for further royalties. In fact, Alberta has long had the reputation of providing an open and stable royalty regime. They day they announce they want to abandon the regime that has put their province's economy on the map, it will be very big news.

In doing some quick research the only references I found to anything like what the Premier claimed was this (Alta Tory leadership hopefuls question whether energy royalty review was done) and this (Alberta NDP are questioning a review of the province's royalty tax regime).

Both of these stories were in response to this where the provincial energy minister, Greg Melchin, stated that an internal review of Alberta's royalty tax regime concluded the province is getting "a fair share" from oilsands and conventional oil.

In other words, the province of Alberta is not looking for higher royalties; the government is satisfied with what it's receiving.

However the premier, in making the argument that we are hard done by in this province while Alberta gets a pass, decided to cite self-serving remarks from political leadership candidates and off-the-cuff statements from an irrelevant leftist political party. Neither of these are credible authorities for what the Alberta government is seeking or, in this case, not seeking.

Suppose Premier Klein characterized remarks from Gerry Reid and Lorraine Michael as "the province of Newfoundland and Labrador wants" this or that? I know I'd chuckle.

There are very good arguments to be made for the difference in the way Alberta and NL are perceived as the two provinces persue industrial economic development.

This is not one of them; do better.

Tuesday, July 11, 2006

Saturday, July 01, 2006

July 1

I found this on the BBC website, a photo reconstruction of the NL Regiment. I'm sure Ed will let me know if it's the real deal because I don't know enough to know

We have it good here in this fair province. We have a day where we can celebrate what these men died for and remember the sacrifice itself. These two things are inextricably linked and are two faces of the same coin.

Enjoy the day and take a moment to remember why we can.