Setting the course on a new Churchill Falls deal

This was the miscalculation (putting all the eggs in one basket, hoping oil prices would stay high), which led to the madness that was the Muskrat Falls project, which was sold to a very uninformed (as to the vagaries of power generation) populace.

I am writing to respond to the letter by J. Gary Leroux, published in the May 22 edition. (“NL sold down the Churchill River-twice.”)

Leroux unfortunately, did not refer to the fact that the great disparity in Churchill Falls revenues between Québec and Newfoundland and Labrador, was partly caused by forces external to the parties to the contract. We all well remember —or should — the circumstance that caused a lot of this unfortunate position for Newfoundland and Labrador.

The power agreement and 1969 contract itself, was negotiated in good faith by both parties at the time. This set the agreed-upon price Québec would pay for Churchill Falls power.

The great additional misfortune for Newfoundland and Labrador came in October 1973, when Organization of the Petroleum Exporting Countries (OPEC) members raised the price of oil by 70 per cent. In December of the same year it was raised another 130 per cent, and embargoes were placed on shipments to the Netherlands and the U.S. This caused worldwide shortages, none more evident than in the

U.S. The U.S. produces huge amounts of electricity, using natural gas, oil and coal and electricity prices rose accordingly, as they were heavily dependent on Middle East supply.

Since then, world oil prices have increased and decreased — as is expected for oil, which is traded as a commodity. The price, for which we use the Brent benchmark, increased eventually to the heady days of about $140 per barrel.

This was the miscalculation (putting all the eggs in one basket, hoping oil prices would stay high), which led to the madness that was the Muskrat Falls project, which was sold to a very uninformed (as to the vagaries of power generation) populace. Anyone who spoke against the project (and there were quite a few) were either ignored or vilified by the successive Progressive Conservative governments of Danny Williams and Kathy Dunderale.

This price then decreased steadily with increased world supply and the advent of technology such as horizontal drilling, which allowed access to oil formerly unavailable to drillers in the U.S. and elsewhere. The U.S. became a net exporter of petroleum products, including LNG. The new green economy will eventually place even more pressure on oil prices.

I am surprised Leroux forgot to mention the complication of pricing in his letter. We did not have a strong enough case to convince the Supreme Court of Canada, twice, to rule in our favour. I too, hope that cooler heads prevail, but we must get past the negative attitude towards Québec which is evident today in Newfoundland and Labrador. This serves absolutely no one.

Geography is sort of final. That province has nearly nine million people, and no oil revenues, so there is a difference between the two when looking at equalization. Newfoundland and Labrador had about $22 billion in oil royalties (cumulative 1997-2019) that accrued to our tiny province of a half million people, and we spent it all, and much more! This is not our oil, as it lies in international waters. It belongs to the federal government, from whence comes our royalties through the UN Law of the Sea Conference principle of adjacency, and the Atlantic Accord.

We have great existing hydropower assets, with 5,400-megawatt capacity at Churchill Falls, (which came in on time and budget, thanks to competent management) and the relatively small 824 megawatts at Muskrat Falls which is a disaster, both financially and operationally, due to terribly bad planning and management. It never should have been built without the remaining 2,250-megawatt potential at Gull Island being developed, and the power contracted and sold at the right price before construction started, as is normal in many hydro projects. No private financial markets would touch the Muskrat Falls project by itself so our government went alone, and look at the result.

I can only hope that the Newfoundland and Labrador negotiators are clear headed. A new and fair price is what is urgently needed, or a sale of assets providing a way out of debt, or some combination of both.

We are at a disadvantage, as the Upper Churchill contract runs until 2041. We have the greatest opportunity we will ever have, going in now with the Big Reset.

I totally agree with Leroux that any deal must be a win for both parties and talk we must. Graham Armour Kippens