St. Valentine’s Week Massacre

For Lloyd Matthews, Newfoundland’s energy minister, the week of February 14th could not have been worse. It was his own St. Valentine’s week massacre.

On Tuesday of that week Exxon Mobil, the world’s largest oil company, put almost all its Grand Banks exploration licences up for sale, and the next day, Chevron Texaco announced the shelving of its Hebron Ben Nevis project. Not since the Ocean Ranger went down on February 15th in 1982 has Newfoundland’s offshore industry taken such a blow.

Chevron’s Hebron Ben Nevis was the “fourth field”, the project that was supposed to start up after Husky Oil launched its White Rose field to join the currently producing Hibernia and Terra Nova fields. Oil observers are now nervously watching Husky Oil, the third field proponents, fearing that the same economic circumstances that drove off the larger oil companies may force a delay to the White Rose project as well. Husky is still mulling over its options and is expected to say “yea” or “nay” this summer.

Chevron cited the low world price of oil and the expensive nature of the Hebron Ben Nevis development for shelving the 400 million barrel project. Unlike Terra Nova and Hibernia, Chevron’s oil reserves were heavier, requiring more expensive wells to develop.

Although the oil companies and the politicians avoided the subject, part of the reason for this chill in Newfoundland’s oil patch is the extremely long time the developments have taken to clear government obstacles put in their path.

Hebron Ben Nevis was first discovered in 1981 at a time when oil was selling for over $40US a barrel. In real, inflation devalued dollars, oil is now selling for 75% less. The huge ownership dispute between Ottawa and Newfoundland that delayed offshore development for most of the 1980s may have delayed these oilfields beyond the time they were economic. Although oil prices fluctuate wildly at times, the long-range price of oil, in real inflation adjusted dollars, has been down for most of the twentieth century.

These delays, while they may have cost Newfoundland dearly, may also harm much of the oil exploration that could have gone forward in the Laurentian Trench, that disputed body of water that lies between Cape Breton Island and southern Newfoundland. Nova Scotia and Newfoundland are still before an arbitration board to demarcate the line between their respective provinces. No substantive exploration has yet to occur. Now, none may.

Politically the Newfoundland Government has been able to sustain support for this extreme, go-slow policy by arguing that oil reserves are going nowhere and will be more valuable in the future if they are not developed today. That’s why it has political support for the six-year delay in exploiting the rich nickel deposits of Voisey’s Bay.

But as the price of oil demonstrates, natural resources don’t get more valuable with time. Oil prices spiked in 1981, and it may be unfair to choose that as ones point of comparison, but it does coincide with the time of discovery. If the oil deposits had been developed in the 1980s, today Newfoundland might be looking at a succession of oil fields producing oil from both the Grand Banks and the Laurentian Basin.

But the diminishing value of oil is not an anomaly. Most natural resources including nickel have declined in price over most of the last century. Even though we use these resources more extensively than ever before, we recycle 25% of our nickel now and find new reserves faster than we use them up. A widely used mineral index estimates that most natural resources have declined in price by 50% since 1950. With few exceptions most natural resources decline in value as time goes by. Delay then becomes deadly.

Even hydro-electricity suffers from the same declining value. In Newfoundland a sense of outrage over the original 1960s hydro contract for the Upper Churchill, in which a desperate Newfoundland signed long term fixed-price contracts for its power, has allowed successive governments to delay the development of substantial power resources on the lower part of the Churchill River. The last attempt to sign a deal with Quebec foundered on the uncertainty that deregulation of the US energy market has engendered. It may be that the time for large-scale remote hydro projects has now passed.

The widely held belief that natural resources increase in value as time goes came from the environmental movement that seized the public’s imagination in the 1960s.
Spurred on by Rachel Carson’s “Silent Spring” a succession of environmentalists predicted that we would face enormous shortages of natural resources by the end of the century. None of those apocalyptic events occurred, and natural resources are cheaper and more abundant now than ever before.

Both Exxon Mobil and Chevron are pulling out of the Grand Banks, but they are still actively pursuing development opportunities elsewhere. In a one-superpower world, large oil companies can go anywhere they want to produce the oil the world demands. Whether that is the Middle East, Russia or Alberta’s tar sands, is now immaterial. On land, and in more hospitable climates, oil wells can be drilled for a fraction of the cost of a Grand Banks offshore oil well.

Unfortunately none of the governments that contributed to the massive delays that now make offshore oil a marginal operation have admitted their culpability. The federal government and Newfoundland were the most pig headed in this long standoff, although the Nova Scotia government got into the act with the Laurentian channel delay, and Quebec is partially responsible for the delays in developing the Lower Churchill.

Today development of many projects is slowed even further by the patently unfair clawback provision of the equalization program. There is not much incentive for an equalization-receiving province to develop its natural resources when 80%, or more, of the royalties are siphoned off to federal coffers. In the end, this wrangling over the goose who lays the golden egg may see the goose die of old age before a single egg is laid. Removing natural resources from the equalization formula may be the only way to salvage these dying mega-projects.

In Newfoundland, the prevailing opinion that natural resources increase in value the longer one waits is still an obstacle to development. In addition to the damage it has done to the offshore oil sector, it has delayed the development of the Voisey’s Bay nickel project and has allowed a succession of governments to let Churchill River power flow to the ocean without producing any wealth. Even now the official opposition is demanding Inco meet impossible conditions before the Voisey’s Bay project can proceed. The current administration’s politically risky, but more economic scenario, may founder on the mistaken belief that nickel will be worth more a decade from now.

Whether the collapse of a significant portion of the offshore oil industry will inject some semblance of reality into the collective consciousness, and into the governments that are driven by these beliefs, remains to be seen. In the meantime, time marches on, and development opportunities continue to slip away.