As Sable offshore revenue plummets, province faces hard decisions
The drop of millions in offshore revenue is a stark example of the financial problems facing the province, says Finance Minister Graham Steele.
When the NDP won power in June last year, the province had just reaped a $452-million windfall in royalties from the Sable Offshore Energy Project.
That was the high-water mark in provincial royalties since production started in 1999, but declines in production and natural gas prices decimated the provincial take last year by 72 per cent, to $126 million.
“The huge hit was between the previous government’s last year and our first year,” Steele says. “We were unlucky enough to accept the handoff. . . . It’s no wonder that our government is running a deficit right now.”
Looking ahead, the province estimates royalties will bounce back up to $174 million this year, but the revenue is going to dwindle.
A new project, Deep Panuke, is scheduled to start production next year, but the royalties aren’t expected to come close to those recently generated by Sable.
It’s unknown just how long Sable will keep going. Lead partner ExxonMobil has said it will be for “some years,” which means it’s likely to span at least the current mandate of the NDP. The next election is expected in 2013, also the NDP’s target for balancing the budget.
ExxonMobil delivered bad news to the province last month, saying it won’t expand Sable.
So, what’s the upshot for taxpayers as the revenue dries up? Tax increases? Program cuts?
Steele says those are the tough choices facing the government, borne out of not just lower royalties but other revenue sources, too.
“The royalties are just a particularly stark example of that, but it’s the challenge we’re facing across the board,” he says.
“People see those decisions being made in things like an increase in the HST. . . . And as we reform things, for example, in health-care finance, which is the big spending item, part of the reason we have to do that is precisely because the revenue is drying up and we cannot for very long continue to spend more than we’re taking in.”
The royalty revenue ranged from $2 million in 1999-2000 to $28 million in 2004-05. Then the steep rise came — $124 million in 2005-06, $269 million the following year, $400 million the next and then the peak, $452 million.
That last year, royalties were the province’s fifth-highest source of revenue, more than items like corporate income tax, and the tobacco and gas tax combined. The $452 million would have been enough to fund the departments of agriculture, economic and rural development, health promotion and protection, energy, environment and natural resources, with almost enough left over to cover tourism.
Steele says he “gently criticizes” the previous Tory minority government that enjoyed those big royalty paydays for creating ongoing programs with cash that was going to run out.
“We all knew that this revenue was going to hit a peak and decline,” he says.
“The money should have been used a lot more carefully than it was, so the fundamental challenge facing our government is we have all these expensive programs that were fuelled by high royalties, but the problem is that now the royalties are not high and we still have the programs to pay for.”
Steele didn’t give any examples of programs created with royalty cash, but said anything created during the days of high royalties is part of the problem.
Tory energy critic Cecil Clarke demands that Steele identify the programs.
“I haven’t heard which programs he finds that were ill-funded and, more importantly, which ones would he axe?” says Clarke.
Clarke says he hasn’t seen an NDP offshore energy strategy for the province, and would like to know what action the government has actually taken since ExxonMobil’s announcement.
The $1.5 billion in royalties in the last decade — exceeding a 2004 estimate of up to $1.1 billion in 12 to 15 years of Sable production — are just part of the impact offshore activity has had on the province’s bottom line.
The Energy Department released an analysis in April that showed the offshore industry employed an average of 3,200 Nova Scotians a year between 1996 and 2007. Household income averaged $117 million a year, while the industry spent $2.5 billion on development and production.
Personal income and corporate taxes could also take a hit with the offshore’s decline.
Charles Cirtwill, president of the Atlantic Institute for Market Studies, said it’s about time the government realized it has to be careful with offshore revenues.
“These are the kind of artificial crises that we create for ourselves when government goes around picking winners and losers and saying things like, ‘The offshore is going to be the saviour of Nova Scotia,’ ” says Cirtwill.
“Or, what we’re saying today, ‘Renewables are going to be the saviour of Nova Scotia.’ When you pick an industry and you put all your bets on that industry, this is the kind of angst that you create for yourself. It’s unrealistic, it’s unnecessary, and it’s not how a real economy functions.”
Cirtwill says a diverse economy is the only way forward for Nova Scotia, and the offshore was never going to be a cornerstone of the economy here.
Donald Savoie, who authored a recent report on economic development in Nova Scotia, also didn’t identify the offshore as a key driver of the provincial economy.
Savoie, who also chaired an advisory panel for Premier Darrell Dexter last year, said he didn’t include it in the report because so much is out of the province’s control, like natural gas prices and development of new projects.
“I would look at oil and gas as a bonus, not as a driving force,” he says.
Cirtwill says it’s time for the Dexter government to get down to making the tough choices it’s talked about.
“Decide what the priorities are, and make sure that those are delivered to the highest level at the lowest cost possible,” he says.
The province is embarking on an extensive expenditure review, and plans to trim the civil service by 10 per cent over four years.
Christine Saulnier, director of the Canadian Centre for Policy Alternatives’ Nova Scotia office, says ExxonMobil’s decision against Sable expansion is a blow to the province.
But, she pointed out natural gas prices are bound to rise, which could again spur activity offshore. She said the province can use this downturn to refine its policy framework, and even look at getting involved again in offshore projects.
“I think there is some optimism there and I think we need to be better negotiators when that does happen,” she says. “And we need to be talking about that before the gas prices go up. And if we have at least a stake in the resources provincially, then companies can’t so easily pick up and make these kinds of decisions.”