‘It’s a positive thing for treasury’

Soaring gas prices may be getting you down, but provincial coffers are thankful

No one likes paying extra money at the gas pumps, but escalating oil prices have an upside — a rosier fiscal picture for the province.

Budget 2021 projected the price of oil at US$64 per barrel. The average price since April, however, has been US$72, Finance Minister Siobhan Coady said Friday, Oct. 15.

Oil was at roughly US$85 Friday morning and speculation has oil prices continuing to climb.

That’s positive news, certainly, but Coady is quick to note the fiscal year is not even half over yet.

Another factor is the Canada-u.s. exchange rate. Basically, the better the loonie does against the U.S. dollar, the worse it is for oil revenues to the province. Because oil is traded in U.S. dollars, when the U.S.. dollar is lower, it makes the oil commodity less valuable when converted to Canadian currency.

At the time of the budget, the exchange rate was 79.6 cents. Now it’s 80.4 cents.

The other factor is oil production, which is down somewhat, Coady noted.

A fiscal update will be delivered later this fall — likely in November — and department officials are busy crunching numbers, so Coady wasn’t able to give a ballpark figure Friday as to how much better off the province is.

For every $1 increase in the price of a barrel of oil, the government receives $19 million more in oil revenues. Each one cent increase in the value of the Canadian dollar detracts $15 million.

“Right now if you just take those two variables, we’re to the good, because we’re up,” Coady said. “We’re a little bit down on production, but overall this has been a good year on oil royalties. It’s a positive thing for treasury and that will make all of us happy, especially with all the pressure we have.”

Any windfall from oil price hikes, or profits from the sale of any assets, are prioritized to go on the debt and deficit, since the public expects the province to keep spending under control, Coady said.

She said the fiscal update should show that the province is hitting its budget targets, as extra COVID-19 expenses are factored in.

“I don’t think there will be any surprises in the economic update, but I will say it will be helpful to have more revenue coming from the oil and gas industry, of course,” Coady said.

The province learned an excruciating lesson from the squandering during boom times, when the province went on a spending spree without setting aside a future fund.

A future fund is something the Liberals hope to bring to the House of Assembly.

Coady said there are other positive signs for economic improvement.

Housing starts in the first eight months of 2021 were up 18.8 per cent over the same period in pre-pandemic 2019.

Consumer spending for the first seven months of 2021 was up 12.2 per cent over the same period in 2019.

And the export of minerals and mineral products was up 69.8 per cent in the first six months of 2021 over 2019, boosted by higher prices and increased iron ore production.

Coady also noted the booming film and TV production sector — including Disney’s Peter Pan movie — and activity in the technology sector.

“What I am seeing is, we are emerging from the pandemic and we still have challenges because of COVID, we still have challenges in some sectors of the economy, like tourism, and that’s why we’ve given additional support to tourism and small business. … (But) there’s strength coming back to our economy,” Coady said.

CONTINUED DEMAND

While climate-change pressures the Newfoundland and Labrador economy to diversify, worldwide demand for oil and gas isn’t going away any time soon — not for several decades yet, Harris Centre director Rob Greenwood said.

Energy from this province is more efficiently produced, or cleaner, than other production areas, such as Alberta’s oilsands, he said.

With demand for oil and gas continuing, albeit tapering off over time, Newfoundland and Labrador therefore becomes a superior environmental choice as the energy sector goes green, he said.

Greenwood likens it to the Industrial Revolution, and points out the transition from craft workers to mechanization did not happen overnight.

“There will come a time when overall demand for oil and gas will be a fraction of what it is now. No one can tell you when that will be,” he said.

Greenwood said he would not be surprised if there are more significant oil price spikes to come.

But as the price of a barrel of oil rises, will there be another boom?

Not likely.

“I don’t think we will see the boom like we had in the Danny Williams years, maybe never again,” Greenwood said.

The potential economic benefit of green energy is nowhere near that of oil and gas.

But Greenwood said the worst of the economic downturn is behind us, especially with the mining and aquaculture sectors doing well, the potential of new technologies, and the continued resilience of the fishery.

CAUTIOUS OPTIMISM

Paul Barnes, director of Atlantic Canada and the Arctic for the Canadian Association of Petroleum Producers (CAPP), said whether the oil price spike bodes well for the development of additional oil projects in Newfoundland and Labrador isn’t easy to predict.

“It’s too uncertain now to say how it translates for investment in Newfoundland and Labrador,” he said.

There’s cautious optimism, Barnes said, but no guarantee, since companies will use profits to pay down debt incurred during the pandemic, and then evaluate where to invest.

They have interests in many other places, as well as motivation to diversify their portfolios to other forms of energy, such as electricity and hydrogen.

Clearly, the province stands to make more money from royalties on existing projects, but higher prices are a double-edged sword, since they drive up the cost for goods and services, Barnes said.

The key to attracting investment to kickstart more projects, he said, is for Newfoundland and Labrador to remain competitive and ensure the right royalty and fiscal regimes are in place. That’s something the provincial government needs to be on top of, he added.

Barnes said the recommendations of the task force on recovery of the oil and gas industry need to be put in place soon, as do some aspects of the Premier’s Economic Recovery Team report.

The province has great geological prospects and that’s why multinational companies are here, Barnes said, adding that the government still has to create the right business conditions to encourage more investment.

COMMITTED TO SECTOR

Coady said the province is working on diversifying the economy, including shifting to greener energy, but is still committed to the oil and gas sector.

“Certainly, we want to encourage more investment in the oil and gas industry,” Coady said.

“The province has been working diligently with all the oil and gas companies as we emerge from the pandemic. You’ve seen investment in projects, and I will use Terra Nova as an example. That has now been sanctioned moving forward because of supports that both the federal and provincial governments have done to move that project forward. ... Certainly, the price has rebounded substantively and we have tremendous opportunity in our offshore oil in terms of the lower carbon per barrel and the amount we are seeing on seismic offshore Newfoundland and Labrador.”