by Peter Fenwick

Late last week, the Newfoundland and Labrador government broke off talks with the corporate consortium that wants to develop the Hebron Ben Nevis offshore oil fields, which are believed to hold as much as 700 million barrels of recoverable oil. According to Premier Danny Williams, the oil companies were willing to give the province part ownership of the field, but insisted on unacceptably high tax breaks in return. In the wake of the talks’ collapse, Williams has been threatening to buy out the stake of one of the partners.

A few weeks before arriving at this impasse, provincial Energy Minister Ed Byrne was wondering aloud why no new significant offshore oil fields have been discovered in the last 20 years. (Hebron Ben Nevis was first discovered in 1981.) He should wonder no longer.

The failure of the oil industry to find new fields in Newfoundland is primarily the result of unstable government development policies that discourage companies from investing. Under questioning by the St. John’s media, even Premier Williams recently admitted that the oil rules are in a constant state of flux. Until the regulations become fair and predictable, Newfoundland’s offshore is likely to stay undeveloped.

Newfoundland has a basic decision to make: Does it want to extort every last job and economic benefit from the four fields that have been discovered so far, or does it want an expanded exploration effort spurred on by fixed rules? It cannot have both.

So far, the province has given mixed signals. Development of the first oil field, Hibernia, which is thought to contain more than about 800-million barrels, was negotiated at a time during the 1980s when oil prices were low. Development proceeded only thanks to large subsidies from both the provincial and federal governments.

Subsequent developments on the Terra Nova and White Rose fields — containing about 400 million and 200 million barrels, respectively — were less complicated, involving a generic royalty scheme. As a result, development proceeded apace. Since the province’s income from the oil fields was being clawed back by reduced equalization payments, Newfoundland’s government was more interested in creating jobs than generating revenue, and so it merely asked that the bulk of the construction work be done in-province.

The fourth project, Hebron Ben Nevis, has followed a more tortuous path. It was initially shelved as uneconomic a few years back, when oil was selling at a fraction of today’s high price. With oil at US$60 a barrel, however, the field is now apparently viable. But instead of allowing the companies to proceed under the generic royalty regime applied to Terra Nova and White Rose, the provincial government has insisted on a flock of new conditions.

Among those conditions is the requirement that the companies build an oil refinery in the province, and fork over an equity position in the project. Thanks to the generous amendment to the Atlantic Accord, negotiated with Paul Martin’s government in 2005, the province now gets oil-field-generated royalties and taxes — which means that securing jobs while forfeiting revenue is no longer an attractive strategy.

The provincial government points to the equity position that the government of Canada holds in the Hibernia field as a precedent for its insistence on an equity position in Hebron Ben Nevis. But what the government does not acknowledge is that Canada injected that equity into Hibernia in order to keep the project afloat when one of the original backers bailed out. In this case the province proposes to do the opposite: try to get an equity cut when oil is dear. Looking at things from the oil companies’ point of view, it’s easy to see why things have reached an impasse.

It would be a mistake for a government to buy back into an oil company when most jurisdictions in the world are moving in the opposite direction by privatizing. But the greatest harm Premier Williams’ government is doing is raising a huge red flag with its attempt at extortion. You can bet that other oil companies that might otherwise seek to invest in Newfoundland’s offshore are paying close attention.

The existing Hebron Ben Nevis corporate stakeholders will eventually have to make the best of a bad deal. But other oil companies contemplating an investment may decide that it is too risky to do business with a province that increases its demands every time it feels like it.

There’s a reason Newfoundland has seen over two decades pass since the discovery of a new oil field: If you keep changing the rules, people won’t want to play.

© National Post 2006