Nfld. & Labrador·Opinion

Would offshore oil incentives help us right now? Be careful what you wish for

Desperation, writes Patrick Laracy in a guest column, is never a good bargaining strategy.

'Given the vulnerable state of our economy, we should be particularly careful'

An oil rig sits in Bay Bulls. Based on our offshore history, incentives for oil exploration come with a price, writes guest columnist Patrick Laracy. (Submitted by Tyson Hodder)

This column is an opinion by Patrick Laracy, a geologist and lawyer in the petroleum and mineral industries. For more information about CBC's Opinion section, please see the FAQ.

There appears to be a growing chorus in favour of offshore oil exploration incentives in the belief it will offset some of the stress currently facing the local industry.

Given the turmoil in the oil markets and the resulting fallout, I suspect that the only effective solution to low oil prices will be higher prices. Based on our offshore history, incentives for oil exploration come with a price.

Having worked for the provincial government in the early '90s and represented the province on various offshore joint committees with Ottawa and Nova Scotia, my experience is that Ottawa has never been fond of our power under the Atlantic Accord. Both of these realities are linked.

It is worth reminding ourselves that the Petroleum Incentives Program of the early '80s was a child of the National Energy Program and the promotion of federal interests in the offshore through Petro-Canada. I worked at Petro-Canada in Calgary at the time.

The NEP, among other things, expropriated 25 per cent of all the petroleum interests offshore without adequate compensation to the interest holders. PIP grants were really an attempt to placate industry for that federal overreach, while also asserting greater federal influence in the offshore. A clever piece of manoeuvering.

The price of oil has dropped drastically in recent months, with rigs off the coast of Newfoundland ceasing drilling. (Submitted/Transocean)

This happened when Canada's self-sufficiency and security of oil supply was a legitimate concern.

A power susceptible to being undermined

In fact, the Atlantic Accord contains a "security of supply" provision. When security of supply is not in jeopardy in the country, as is the current situation, the province has paramount jurisdiction on key decision-making in the offshore.

That has been the case since the '90s, and as such the province has ultimate authority over the approval of offshore projects. This authority is coupled with the province's power in the Atlantic Accord to set the fiscal framework for any development.

In other words, the province can set terms for a particular project that can make that project economically viable or not — an unprecedented power federally delegated to the province. 

But, this power structure assumes that whether or not a project proceeds is primarily an economic one and not an environmental one.

With the recent changes to the federal offshore environmental review process (formerly Bill 69), the provincial power is susceptible to being undermined if projects are hijacked by environmental roadblocks, thus nullifying economics as the determinative factor in their development. 

To use a familiar metaphor, Bill 69 has shifted the (environmental review) goalposts. This creates further uncertainty in the regulatory process, which is not in the provincial interest nor in industry's interest.

The Atlantic Accord Review Agreement of April 2019 was being negotiated at the same time that Bill 69 was being ushered through the legislative process. The agreement provides the province with a stream of cash payments funded primarily by the proceeds from the federal government's 8.5 per cent equity ownership interest in Hibernia.

Further, in that agreement the province "agreed to restrict petroleum activities in the proposed Laurentian Channel Marine Protected Area" (Sydney Basin and St. Pierre Bank region). In other words, we reduced the size of our open offshore area for exploration by 11,580 square kilometres. 

The Laurentian Channel was designated a Marine Protected Area in April 2019. (Department of Fisheries and Oceans)

In an attempt at balance, the agreement couples this concession with the acknowledgement that exploration could proceed in the Northeast Slope Marine Refuge (Orphan Basin) area.

Gained nothing we didn't already have

But exploration could proceed there anyway under the Atlantic Accord, so we gained nothing in that regard that we didn't already have. It would seem, on the face of it, that incentives come with a price.

That is not to say that the price for future trade-offs may not be worth the benefits gained.

Higher oil prices will be the cure for our current offshore anxieties

That will depend on the province's ability to fully understand the context of the negotiation and the implications thereof, all muddled in the politics of the day. As such, any demands for incentives for exploration should be made with some thoughtful consideration as to what we are prepared to give up in return.

Given the vulnerable state of our economy, we should be particularly careful.

The offshore is critical to our economic recovery. Desperation is never a good bargaining strategy and we know that the realities of the oil industry change rapidly.

Higher oil prices will be the cure for our current offshore anxieties. In the interim, we should reduce regulatory red tape and facilitate favourable tax and royalty structures to maintain competitiveness with other jurisdictions.

Besides, should we not be focused on the immediate production (i.e., Terra Nova) and development (i.e., West White Rose) challenges we face?

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Patrick Laracy is founder of Vulcan Minerals Inc. and has 40 years experience as a geologist and lawyer in the petroleum and mineral industries.


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