Subsidizing offshore exploration
by Fred McMahon


The Moncton Times and Transcript, The Halifax Daily News

Nova Scotia Premier Russell MacLellan was so proud of the bidding for offshore exploration rights that you’d think he pumped the gas out under the seabed all by himself.

Count on it – no matter how badly Nova Scotia messes up the offshore, companies will bid for exploration rights where there’s money to be made, and politicians will take credit for it.

That’s what happened last week in Houston. Premier MacLellan was attending the Offshore Technology Conference in Houston, Texas. While there, he announced the results of oil company bidding for exploration rights off Nova Scotia.

The amount pledged to Nova Scotia exploration stunned even the jaded audience at the Houston conference, MacLellan told reporters back in Nova Scotia.

Conference attendees, MacLellan said, “all started taking notes like mad as we gave the details. Word was getting around we were going to make an announcement, but I don’t think they realized the magnitude.”

Almost immediately, the rain started falling on MacLellan’s parade. Ian Doig, one of Canada’s most astute oil patch observers and the publisher of Doig’s Digest, has already questioned why Nova Scotia didn’t charge the going rate for exploration rights instead of basically giving them away.

To that criticism, MacLellan responded the government was more interested in spurring exploration.

So, in effect, Nova Scotian and Canadian taxpayers are subsidizing the big companies in offshore exploration. Since we aren’t charging the going freight for exploration rights, taxpayers will make up the difference.

So, strike one against the great news out of Houston.

MacLellan’s disinterest in relieving taxes on Nova Scotians is largely because of our perverse tax structure. We pick up new revenues and Ottawa reduces equalization payments. Nova Scotia will keep only about a quarter of the extra money from offshore revenues. This perversity in our tax system affects all Atlantic Provinces and has caused several provinces to spurn new revenue sources.

Still, MacLellan was happy to brag about the $600 million in promised spending on offshore activity. Yet, Jim McNiven, former Nova Scotia deputy minister of economic development, says only one dollar in five will be spent locally.

“Bear that in mind,” McNiven told a conference last week after MacLellan’s announcement, “when you hear about big offshore figures. Most of that will just be sent down to Houston.” This only reinforces the need for government to take appropriate rents for offshore activity.

Strike two.

Then there’s the question of gas distribution in Nova Scotia. Everyone I’ve talked with in the petrochemical industry believes Nova Scotia bungled the process with changing and muddy rules, and a shifting cast of characters.

The government gave away rights to dedicated distribution to big users before developing a plan for the province as a whole. This will result in fewer Nova Scotians receiving natural gas while others pay a higher cost than necessary.

That could hamper economic growth in poorly served areas. But, who knows? The process was too opaque, and individual Nova Scotians had a hard time figuring out what was going on.

Strike three against the province’s offshore strategy. But an even greater problem looms.

Nova Scotia has failed to develop any forward looking plan for the future of the petrochemical industry and how it will affect the indigenous economy.

Here’s the great threat. Offshore activity will push up costs, particularly labour costs. That makes for a tougher environment for local businesses, especially export-oriented businesses which will face higher costs here while battling the same price competition in export markets.

And, if the Nova Scotia government simply soaks up its quarter of offshore revenues and shoots it out as higher spending, the pressure on costs becomes even more dangerous as government joins with the petrochemical industry in inflating the economy and making things difficult for non-petrochemical businesses.

That’s what the Dutch government did in the late 1960s and the 1970s with its huge natural gas revenues. As a result, the Dutch destroyed indigenous economic activity, devastated growth and suffered higher and higher unemployment – all this despite the petrochemical boost. That seems to be our government’s strategy for petrochemical revenues.

The Dutch have turned their economy around. Unions, business and government worked together – remarkably – to hold down wages. Government cut expenditures and taxes. Economic growth and job creation are again strong.

Alberta and Texas use petrochemical revenues to keep taxes low to offset cost pressures. Their indigenous businesses are able to thrive even in these days of historically low petrochemical prices. The Nova Scotian government could do that. Or, it could act as frugal a Nova Scotian would and use the money to pay down our massive debt.

Yet, rather than learn from the success and failures of other jurisdictions, government ministers are already talking about all the great new things they’ll do with gas revenues.

So, anyone for strike four?