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Big oil standoff an attempt to rectify N.L.'s legacy of bad deals: premier
ST. JOHN'S, N.L. (CP) - It's a high-stakes gamble that could boost Newfoundland's economic viability for decades or dramatically stall the rapid growth of Canada's poorest province.
For four months, Premier Danny Williams has put the long-term growth of the province's offshore energy industry on the line in his fight against ExxonMobil (NYSE:XOM) for higher royalties from the proposed Hebron oilfield.
The hard-nosed Tory leader maintains his position is born out of the province's history of bad business deals. But with Canada's highest unemployment rate and per capita debt, some analysts wonder if Williams can afford to risk losing a battle with big oil.
Williams has insisted on a higher royalty rate for the province and a 4.9 per cent ownership stake in the project, which according to some estimates could produce more revenue for Newfoundland than its three other offshore operations combined.
ExxonMobil, the largest equity holder in the $5-billion project, has warned that the premier's refusal to budge could stunt the growth of the province's offshore oil industry.
One week after ExxonMobil posted the second-largest quarterly profit recorded by a publicly traded U.S. company (ExxonMobil also posted the largest), Hebron remains on the shelf and Williams has reinforced his position.
"A lot of this is posturing," said Memorial University economist Doug May, adding that many in the province support the government's quest to wrest more money from ExxonMobil and its partners.
"He is the legal counsel on this for the people of Newfoundland and Labrador, and like most clients, I think he has the whole backing on this, from a historic basis, of the people."
In squaring off against ExxonMobil, Williams has cemented his reputation as a tough negotiator. He insists he is only seeking a fair deal for a province that has been repeatedly short-changed when developing its natural resources.
"That's been our history, that's been our heritage and we paid a huge price for that," Williams said in an interview.
In 1972, when the Churchill Falls hydroelectric dam in Labrador was completed with Quebec's help, Newfoundland soon found itself stuck with a lopsided deal that would cost the province billions of dollars in lost revenue.
Under the infamous deal with Quebec, set to expire in 2041, $750 million has flowed into Newfoundland's coffers as of 2004, the most recent figures available. Quebec has pocketed almost $1 billion annually.
"Now, what a billion dollars would do to our bottom line," Williams mused in his office. "We wouldn't even be close to being a have-not province."
Newfoundland's economic conditions were ripe for a lopsided agreement when premier Joey Smallwood signed the Churchill Falls deal in 1969. Like today, the province was coping with a high unemployment rate and desperate for economic development.
Williams's refusal to give in to the temptation of a quick deal is a gamble, but one that may ultimately prove successful, said Rand Dyck, a political science professor with Carleton University.
"Many parts of the province are in bad shape today, yes, but Williams is saying, 'I know that, but I'm not going to repeat the mistakes of my predecessors,' " Dyck said.
"I have some sympathy for that position given that what he says about his predecessors is so true."
Still, the business-savvy premier, who earned the monicker Danny Millions after selling his cable TV company to Rogers Communications in 2000 for $230 million, knows the province faces some tough economic challenges.
Newfoundland's forecast growth of 4.6 per cent over the next two years, which trails only Alberta, will diminish significantly after 2007, according to a recent report by the Conference Board of Canada.
A declining population, the highest unemployment rate in the country and weak consumer spending are expected to offset any revenue the province generates from the offshore oil business.
The province is also grappling with a massive per capita debt of $23,000 - the highest in the country.
Meanwhile, relations between the premier and ExxonMobil appear icy in public.
But beyond the bluster, Williams said the two sides are constantly in touch behind the scenes.
"This is not a question where two people are just in a snit and they're just not talking to each other anymore," he said.
Officials with ExxonMobil declined to comment on the state of negotiations, but spokeswoman Margot Bruce-O'Connell said she was unaware of any talks.
Meanwhile, Newfoundlanders are well aware of how the premier's hardline stance against Ottawa two years ago won him an improved Atlantic Accord, which gave Newfoundland full protection against equalization clawbacks on offshore royalties over the next six years.
But don't expect the oil industry to concede defeat in a similar fashion, mainly because the Hebron project remains a small and relatively expensive play for ExxonMobil.
"Unless these companies are prepared to forecast using higher oil prices, they're likely not to do the project (this year)," said Tom Ebbern, managing research director with Calgary-based Tristone Capital Inc.
Hebron's heavy oil contains a high sulphur content and is therefore more expensive to refine, Ebbern said.
Memorial University economist Wade Locke found that the oil industry's contribution to Newfoundland's treasury is expected to peak at $1.7 billion in 2011 before sharply dropping off.
But Hebron could add another $8.1 billion to the province until 2035, Locke said.
"It's in everybody's interest - the oil companies, the province - for this project to go forward," Locke said. "There's a lot of money involved."
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