A discussion with NOIA’s Charlene Johnson on the prospects for Newfoundland and Labrador oil and gas

On the Growing Pains podcast this week we interview Charlene Johnson, CEO of the province’s oil and gas industry association, NOIA.  I have done some work with NOIA and therefore am familiar with the importance of the offshore oil and gas industry.  We talk about Norway’s aggressive new push to attract offshore oil and gas exploration and efforts to get the Canadian government to provide similar incentives here.

I know some folks are concerned with the term ‘incentives’ but in reality what is being proposed is an effort to make Canadian offshore oil and gas investment competitive.  If the exploration costs (and the risks of exploration) are much higher here than elsewhere in the world (e.g. Norway) why would firms invest here?

Just this week I got an email from someone suggesting that if we eliminated all the vast subsidies to the oil and gas industry and invested all that money into renewables we would have a stronger and greener economy.

I have written about this before.  I don’t understand this logic.

The old trope applies – 100% of nothing is nothing whereas 20% of something is at least something.  Canadian governments – provincial and federal – need to put regimes in place that are competitive with other jurisdictions around the world.  Pushing up tax or royalty rates to the point they dramatically curb or eliminate investment is essentially the same as designing a program to ensure no investment.

If you had a 80% corporate income tax rate on manufacturing and you decided you wanted to attract manufacturing investment you would do you research and determine the tax rate needed to drop to 15% to be competitive.  It could be argued that would be a massive subsidy or it could be argued this is just making your jurisdiction competitive for manufacturing investment.

Let me illustrate with the math:

Government A charges what would amount to $100 million in tax and royalties to develop Oil and Gas Project B.  Government A realizes they can’t attract investment at $100 million so drops the amount to $50 million and is able to attract Oil and Gas Project B.  As a result the government doesn’t get $100 million but they get $50 million.

The opponents of the oil and gas industry call the lost $50 million a ‘subsidy’ and say that if the $50 million oil and gas ‘subsidy’ was plowed into renewables we would have a green and clean economy.

But as I just showed, in this example, adding that $50 million to the cost would kill the development of Oil and Gas Project B.  So not only is the $50 million ‘subsidy’ lost so is the other $50 million in oil and gas tax and royalty revenue.

So instead of plowing the $50 million in oil and gas subsidies into renewables, we are out $100 million and have minus $50 million in revenue to fund health care.

This is the point with the oil and gas sector.  We want an industry that is generating significant tax and royalty benefits but we need an environment that attracts investment – not repels it.  This applies to the exploration environment.  If other jurisdictions have far greater risk mitigation regimes, we will not attract the investment.

I thought that Justin Trudeau (and Rachel Notley) had the language on this right in 2015.  As I remember it he was talking about Canada significantly reducing its carbon footprint while ensuring its oil and gas industry could compete for global oil and gas demand as long as that demand lasted.

If it could be shown that Canada “leaving it in the ground” would reduce global supply and accelerate renewable energy, that would be one thing.  But there is no evidence of this.  We are no longer talking about peak oil from a supply perspective, we are talking about peak demand.

If Canada stops producing or doesn’t develop its oil and gas assets, other countries will step up and take our place.  We will lose the economic benefit with no appreciable benefit to the cause of global warming.

The only other point I would make is one that is becoming a mantra for me these days – those with nothing to lose shouldn’t be dictating the policies that apply to those with everything to lose.  In a democracy, this is a recipe for instability.

If we all shared the cost of a certain policy – say the moratorium on cod fishing – then it would be fine for everyone to have an equal say.  But if we lose nothing and ‘they’ lose everything, ‘they’ should have a greater say on the policy.  I’m not saying this is sacrosanct.  This isn’t Moses coming down the mount with the tablets of stone.  But as a policy guide, those with the most to lose should have a strong voice compared to those with nothing to lose.

If we want to kill oil and gas development, then maybe all of us should pay for that loss.  If every household in Canada (including in NL) wrote a cheque now for $8,000 and sent it to the Rock that would be enough to cover the lost revenue (net to government) from oil and gas over the next decades (14M households, $8000 = $112 billion).

These days, of course, you don’t need to write a cheque.

E-Transfer is fine.

Listen to the conversation here: https://www.buzzsprout.com/920539.

 

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