Province should consider foregoing royalties: Tobin
Former premier says it could be part of response package
Former Newfoundland and Labrador premier Brian Tobin says the province should consider a temporary moratorium on the collection of offshore oil royalties in order to help sustain an industry that is critical to the provincial and Canadian economies, but in critical condition because of the COVID-19 pandemic and bottom-of-the-barrel oil prices.
The comments from Tobin, the vice-chair of BMO Financial Group, came as he participated in a virtual town hall organized by Noia, Canada’s largest offshore petroleum association.
While the video conference was centred around Noia’s lobby for more federal government support of the industry during unprecedented times, Tobin suggested the province could add to the cause by reviewing the royalty regime that at one time contributed almost $3 billion annually to Newfoundland and Labrador’s coffers, but has been significantly reduced because of falling prices and decreased demand.
“I don’t have the exact numbers, but I would imagine they have collapsed dramatically from the billion dollar-plus royalty payout the province had been receiving (recently),” said Tobin, who was Liberal premier from 1996 to 2000. “I would guess that it is perhaps 75 or 80 (per cent), or even lower than it has been in more recent years, given the collapse of oil and gas prices.
“I am simply raising the question, especially given the fact that (royalty) regime was put in place by my administration back in ’96-97, is it time to review the regime?”
TOUGH SITUATION
When queried about Tobin’s suggestion, Noia CEO Charlene Johnson, a former provincial finance minister, agreed that “every stone has to be unturned,” but said she “was realistic that the province is in a very tough (fiscal) situation,” and added she “did not want to take away from the effort we are doing in terms of our ask with the federal government.”
That “ask,” which has been made as part of almost two months of talks with Ottawa, is two-fold.
The first part is aimed at stimulating more exploratory drilling.
“What we envision is a multi-well program. The idea behind that is the more you drill, the higher the success rate of a discovery,” said Johnson, outlining a proposal for a graduated tax incentive, between 30 and 70 per cent on capital costs. “Essentially, if there are five wells, it would (begin) at 30 per cent for the first well to 70 per cent for the fifth well.
“So the more you drill, the bigger the incentive.”
Noia is pointing to a similar program in Norway, where 57 exploration wells were drilled in that country’s offshore last year, with more than 25 per cent resulting in the discovery of oil.
Those 57 wells are more than have been drilled in the entirety of Newfoundland and Labrador’s offshore history.
The second request is application, or actually reapplication, of the Atlantic Investment Tax Credit.
“Mainly because it already exists,” said Johnson. “Back when oil was at the price it is today, below the $30 mark, the incentive for development at that time was 15 per cent on new buildings, new equipment, investments of that nature.
“We are proposing 15 per cent now and as the price of oil picks up, have a 10 per cent tax incentive and eventually when we get back to where we were in 2012 and no longer (qualify for the incentive) program, we’ll be happy not to avail of the program.”
SUPPORT FOR MINISTER
Two common themes ran through comments from members of the town hall panel, which also included Mark Dobbin, founder of the venture investment firm Killick Capital, and Fred Cahill, owner and president of the Cahill Group, one of Canada’s largest construction and fabrication companies, and one which has been longinvolved in the offshore oil industry.
One was faith in, and backing for, Seamus O’regan, Newfoundland and Labrador’s federal cabinet minister, whom Johnson described as “all in” in supporting Noia’s request for help targeted at the Newfoundland offshore — and in addition to what already has been recently pledged for the national petroleum industry.
“He is determined, but there needs to be political will of the entire government and we need to help him convince his cabinet colleagues,” she said of O’regan, the minister of natural resources.
That effort to convince the feds has been co-incidental with the coronavirus crisis in Canada, but the desperation level has increased with each passing day.
That was the second theme and main message during the town hall, which attracted nearly 800 viewers/participants, many of them representing Noia’s 600 members.
The association recently conducted a survey of the membership, revealing that 52 per cent of them have had partial or total staff layoffs. Almost as many were anticipating more job adjustment and two out of five respondents reported they won’t survive if the situation doesn’t change before this fall.
LEAVING PROVINCE
During the town hall, Johnson said the attrition has already started.
“Companies are telling us that they are closing shop and leaving Newfoundland and Labrador. And when they leave, they’re never coming back. I’m hearing from individuals who are facing bankruptcy,” Johnson said, reiterating the message that assistance needs to be immediate or, in her terms, “yesterday.”
Tobin said it at least possible the province can join in that assistance by reviewing the royalty system.
“Not with a view, over the longer term, to have Newfoundland take less, because I don’t think that would be wise at all. But is there something to be done on an interim basis, during this critical time when we are trying to secure and sustain the industry in Newfoundland and Labrador?” he asked.
“That might be part of a package with the federal government on the exploration side and development side also coming to the table.
“I think it is a question worth asking, in particular in that what you are collecting is a fraction, a small fraction, of what used to be our royalty base.
“If I was sitting in the provincial cabinet today, I’d be looking at it very carefully and very quickly.”