Province urged to start saving for a rainy day

Province should create a sovereign wealth fund with revenues from Bay du Nord offshore oil development

There is little that connects Bay du Nord and Ukraine. The “Bay” provides no shelter for boats as it is a feature of the underwater Flemish Pass, some 1,200 metres deep and more than 500 kilometres east of Newfoundland and Labrador.

For more than a decade, exploratory drilling in the Pass has probed for oil and there is proof of significant light oil there. Approvals have been provided by Ottawa and St. John’s to recover the oil and existing plans suggest this will be underway by 2025 with first oil by 2028.

Far away from the North Atlantic, Ukraine is in a life-and-death struggle for its survival. The Russian invasion at the end of February tragically continues, with little indication of the ultimate outcome. So far, the reasonably successful Ukrainian countering action on the battlefield continues.

But various embryonic diplomatic initiatives offer little change in either the determination of Russia to control the future of Ukraine or the willingness and ability of Ukraine to maintain its full independence. The most optimistic expectation is for a “little win” for Ukraine but with Russia in control of its land bridge to Crimea and lingering Ukrainian military action to restore the status quo ante.

Closely associated with the war is the international energy crisis. It is an essential part of the ongoing and increasing support and assistance for Ukraine. Like the war, it shows few signs of easing in the foreseeable months. As such, the negative economic effects on Russia will be significant but, as well, the adverse effects on the global economy will increase, especially in the reordering of the global production and consumption of oil and gas.

Equinor, the Norwegian state-owned multinational energy company, is the major company involved in the Bay du Nord project. BP has minority ownership. Both have been active for many years in offshore oil production in Newfoundland and Labrador, with Equinor since 1996, having several exploration, development and production licences. It is probably the world’s most experienced energy company based on its long-standing work in the North Sea since 1972.

The Bay du Nord resource has been extensively mapped since the first discovery in 2009, and there have been expectations its production will significantly increase and extend the available offshore oil reserves for Newfoundland and Labrador. The province’s offshore oil production is now close to 40 per cent of Canada’s light crude production, and Bay du Nord will provide more than 300 million additional barrels.

A DIFFERENT LIGHT

The vagaries of cost of production, price of oil, dangerous environment, water depth, global demand for oil and the expectations associated with dampening and controlling climate change have all influenced decisionmaking associated with the Bay du Nord project. But the war in Ukraine and the associated realization by all western European countries that Russian oil and gas has a near stranglehold on their economic futures has rebalanced the vagaries overnight.

Less than two months after the Russian invasion, Ottawa gave its approval for the project, with Newfoundland and Labrador having done so in 2018. Federal Environment Minister Steven Guilbeault announced the decision on April 6, saying he had determined the project would not cause “significant adverse environmental effects.”

Guilbeault, who is probably the most environmentally conscious person in Canada, told reporters the decision was a difficult one but the associated mitigation controls would ensure meeting the government’s “net-zero emissions” standard by 2050.

The location of the project, within 1,500 miles of western Europe, its size, the quality and experience of Equinor, along with promised mitigation measures, contributed to the positive decision by the federal government.

Undoubtedly, contributing to the decision as well are the dire economic prospects for the Newfoundland and Labrador government. Oil production from existing offshore wells is rapidly decreasing, down nearly 12 per cent in the first three months of this year. This has been offset by the associated increased value of production, up nearly 50 per cent. But the longer-term forecast suggests serious future revenue problems for the government.

THINK LONG-TERM

Last year’s decision by the federal government to assist the province in a $5.2-billion deal to help avert the financial consequences of Muskrat Falls power prices on the island staved off one crisis. The consequences of the continuing depletion of offshore oil reserves would have been even more consequential. The federal government decision on Bay du Nord can be seen within that context, as well.

The Newfoundland and Labrador economy has seen more famine than feast in the last hundred years. Offshore oil over the last 25 years provided welcome relief, even leading to the reclassification of the province as a “have” one in 2008. But the relief from Bay du Nord will be short-lived, and it is time for the province to implement a sovereign wealth fund in which some of the new revenue could be stored and the income used to support ongoing social needs.

The Norwegian government established its sovereign wealth fund in 1990, and today it has over $1 trillion — the largest of all such funds — and has made investments around the world. There are over 200 such investments in Canada, including that of Equinor.

Alberta has had a similar fund since 1976, but today has less than $20 billion as successive provincial governments avoided appropriate and acceptable taxes, such as a sales tax, and instead raided the fund of its assets for daily operational needs.

It is time for the Newfoundland and Labrador government to seek advice and guidance from Norway and Equinor on a sovereign wealth fund. It would be a valuable addition to its technical work on deep water drilling.

“The province’s offshore oil production is now close to 40 per cent of Canada’s light crude production, and Bay du Nord will provide more than 300 million additional barrels.”