Tuesday, January 30, 2007

Premier Danny Williams vs. Big Oil - ABM 4 of 4

This is the last of the series of the 5 top stories of the year as published in the January-February issue of the Atlantic Business Magazine. All of them will be listed on the lower left column under published work when I get the time.


Premier Danny Williams vs. Big Oil

In February 2006 negotiations between the Hebron Ben-Nevis consortium (led by Chevron Canada) and the provincial government of Newfoundland and Labrador collapsed amid public acrimony. No further talks have since been held, nor are any planned for the immediate future.

Meanwhile, plans for the possible expansion of the Hibernia project to exploit the southern extension of the field are now tangled in the thick underbrush of the provincial government approval process. The outcome is far from certain.

Hebron Ben-Nevis was poised to be the fourth offshore development for the province, the project that bridged the gap to a strong petroleum future. While the Williams government stands firm on its position of "no more giveaways", there is a very real potential for medium and long term losses from the delay, for both the public and private sectors.

Lost royalties and taxes (at least in the immediate term) are estimated to be equal to the other three projects combined: some $8-10 billion, depending on oil prices. And this money was scheduled to arrive just as the other project revenues are scheduled to go into a steep decline from a peak of $1.4 billion in 2012-13.

The recent shutdown of Terra Nova and the associated revenue impact on the provincial treasury has provided a sobering indication of the degree to which Newfoundland and Labrador now depends on the revenue from these few oil projects. The mid-term tipping of the provincial budget from surplus to deficit points to the need to have more projects in play.

But government revenues are not the whole story.

For the local supply sector, Hebron represented momentum and continuity, a smooth transition of business and employment opportunity from one project to the next. This project could have kept skilled workers in place and fabrication facilities humming.

In the wake of Hebron’s indefinite delay, firms are now looking for opportunity in other parts of the country and withdrawing personnel and capital from St. John’s, Marystown, Argentia and the surrounding areas. The Burin Peninsula has been particularly hard hit, since the regional fish plants, the only other source of significant employment, have also closed.

The loss of Hebron also represents a break in the path to future exploration and development. The political climate has become so rancorous that petroleum companies seem to have lost some of their enthusiasm for the province: exploration drilling scheduled prior to April 2006 is winding down, with no significant plans for follow-up. For the first time in recent memory, a call for bids offshore Newfoundland and Labrador (the recently-closed Sydney Basin offering) was met with a chilling lack of interests: no bids were received.

With more potential projects around the globe than resources to execute them, petroleum companies seem content to move on to other opportunities. Since oil companies have been withdrawing their senior personnel to more accommodating jurisdictions, the ripple effect on local supply companies has been to scale back also.

St. John’s and the surrounding region has experienced substantial economic stimulus from petroleum-related activity. With the slow-down in the supply sector, a drop in key economic indicators, such as housing prices and employment rates, are already being seen.

So far, Williams’ posture as "Fighting Newfoundlander" has played well in his province: CRA polling shows continued strong approval ratings. However, while public criticism of Williams’ stand has been limited, there is widespread disappointment that more efforts to reach a deal have not been made. His reputation as a successful deal-maker, which attracted widespread support from the business community during the last provincial election, is being sorely tested by the breakdown of these critical negotiations.

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