June/July 2002
Atlantic Business Magazine

Sucking The Well Dry

by Dr. Thomas Tucker

Government protectionism smothers petroleum industry, puts Atlantic Canadians at disadvantage.

Oil and gas production may have arrived off the East Coast, but Atlantic Canadians are still seized with anxiety about what it means. In particular we fear that our resource will be sold off and we will have far too little to show for it. There are two quite distinct ways of responding to this legitimate concern: competition or protection.

Here’s a test of the route you think the region should take in trying to develop its petroleum resources. Should we be given a major share of the economic benefits that the oil and gas industry can produce, or should we earn our share of those benefits?

Being given our share implies that we are owed something. True, we are owed a royalty for our oil and gas, but should we expect to be given more, such as jobs and industrial benefits, without earning them? Should we expect that after selling our car for a fair market price, the new owner is still obligated to chauffeur us around at his expense? According to a recent study done for the Atlantic Institute for Market Studies (AIMS), our royalty regime is fair and competitive. So to be given our share implies that even after selling our resource for fair market value, local businesses should be given a percentage of the contracts, whether their bids are competitive or not.

Earning our share implies providing products and services of equivalent or better quality and price than the competition. By being competitive, local companies are already earning lots of new business. The bonus is long-term sustainable jobs.

Still, many think we should be given more. Critics claim that project developers should accept non-competitive bids for the sake of local content. Yet experience has shown that the only way firms become competitive is by competing. When Government protects us from the competitive world, either through subsidies or compulsory local content, it invariably results in weak companies totally dependent on this artificial market and incapable of attracting new business elsewhere.

Still, many think we should be given more. Look at the negative local reaction when ExxonMobil recently awarded some shipyard work to a Louisiana firm instead of a local fabricator. The local content in PanCanadian’s application to develop the Deep Panuke’s gas drew similar criticism. Critics claimed that project developers should accept non-competitive bids for the sake of local content. Yet experience has shown that the only way firms become competitive is by competing.

Governments protecting us from the competitive world, through subsidies or compulsory local content, invariably results in weak companies totally dependent on this artificial market and incapable of attracting new business elsewhere.

Look at Newfoundland’s recent experience. For the sake of short-term jobs we built a technically obsolete GBS production platform – the last of its kind. Where are those jobs now? Where is Newfoundland’s internationally competitive fabrication industry?

Now, delays, low oil prices and cost overruns in excess of $375 million have contributed to ExxonMobil putting its leases up for sale and to ChevronTexaco shelving the development of the Hebron-Ben Nevis Project. No one is served by short-term jobs, which evaporate when the project is completed, or by creating an uncompetitive cost structure for project developers. Producers will just take their capital elsewhere.

Gas distribution in Nova Scotia and New Brunswick suffers from the same shortsightedness. Requiring the delivery of gas to communities in Nova Scotia, regardless of whether it is economic or not, was a major factor in Sempra Gas abandoning the province. Nova Scotia has finally changed tack, but two years have been wasted in the meantime and consumers are still waiting for gas to become available.

The New Brunswick government sees the fledgling gas industry as a threat to consumers. This is an industry with a negligible market share, no ability to control prices, and no prospect of making money in the near term as it tries to wrestle market share away from well-entrenched electrical utilities and fuel oil distributors. Nonetheless the province has deemed it necessary to “protect” New Brunswickers via a cumbersome and costly regulatory regime. Mostly this has “protected” consumers from signing up for gas; a mere 700 customers have done so over the past two years.

Competition or protection? Self-reliance or government dependence? Earning our way or demanding favours? The choices we make today are going to shape the oil and gas world on the East Coast for years to come. If we choose poorly, the exploration and development activity we have seen will flatten out and decline, and the companies will recoup their existing investments but not risk further investment. Spin-off benefits will dry up. If we choose wisely, we will be an attractive region for international petroleum companies to invest new exploration and development dollars, and we will gain technical expertise and competitive know-how that we can sell far beyond our shores. Time is short for us to make the wise choices.

Dr. Thomas Tucker is the AIMS Fellow in Natural Resource Policy and author of Having our gas and selling it too: Natural gas distribution in Atlantic Canada.

Note: An edited version appeared in the June/July issue of ABM