Signposts on the road to hell

BDN may cost us what little's left of the Accord

The road to hell is paved with good intentions.

In the academic world that studies how people make decisions, you could call it “incremental decision-making.”

Bit by bit.

Only looking at one thing at a time with no sense of what knock-on changes one seemingly small act will make.

Trump attacks Iraq.

Good example.

Or the government’s equity stakes in the offshore.

Started in 2006 with Hebron but it really was only seen as a way of getting some asset to mortgage for the Lower Churchill. The stakes were too small - less than five percent - and as much as the Pea Seas under Danny Williams talked about an oil company run by the province initially, that vanished with Ed Byrne. But the idea of equity stakes and all the liabilities for close-out and the conflicts of interest in the way the thing was set up remained.

Equity in BDN is not new. Paul Davis said there was a deal coming in 2015 without equity. Dwight Ball announced a deal in 2018 for a small project but with a big cost for taking equity. Now we have a deal with double the costs from just eight short years ago and without any dramatically bigger benefits. In fact, that floating dock thingy adds all sorts of risk and liabilities that don’t seem like anyone has thought about, either.

No one thought about equity and the knock-ons. Equity killed a Hebron deal in 2006. Danny wanted 8.5% for one reason: that’s what Ottawa had taken in the 1992 Hibernia bail-out when oil was low single digits a barrel and Gulf Canada resources bailed. He settled for 4.9%.

Just so no one tries to claim some bigger master plan, here is exactly what Danny said at the time (2006):

...A critical milestone for them on equity was 5 per cent. Five percent and above jeopardized the joint venture agreement. There was extra voting rights. There were other rights and privileges that were above 5 per cent. Our preference would have been to obtain, at least, 8.5 per cent. That was our original goal because that is a benchmark which has been set by the federal government in the Hibernia project and that was a number that we were trying to achieve. However, in order to try and reach an agreement with these companies, we moved to the 4.9 per cent position because that was a position that they felt was acceptable to all the partners....

No master plan. No big idea. No long-term goal. Just a single idea that literally hadn’t been on the table before. Negotiations were basically from the “ask-for-shit-and-see-what-happens” school.

BDN is way different. Way, way different. Way the frig offshore. Further the frig out at sea than any production well now. Then way the frig under water. Not deepest but close. And then way the frig under ground. Way bigger risk.

Even though the provincial government doesn’t get to make a decision until November, odds are high they will not only take the full 10% share - way costlier and riskier than ever before with no defined provincial goal - but they might have to put up more and more.

The reason is simple. The new crowd running the place threw this project out there as something that must light the way to our bright future. As Premier tony Wakeham put it:

…this is not just another MOU. This is not just another Framework [sic] agreement. It is not a rubber stamp or a hollow announcement.

It is real.

Real jobs.

And real revenues.

So there’s your 10% equity right there, already done and for the low price of about $1.2 billion up front or 10% of the capital expense of building it. Then there’s another $1.5 billion as the government share of the operating expenses.

The treasury would get $1.4 billion, once the expenses come out according to the estimate this month.

But 10% might not be the cap.

One of the two companies pushing development of the Bay du Nord field wants out.

Well, not all the way out but a bit out. Out enough to make it a problem.

BP has been quietly offering some of its interest in BDN for sale, as AllNL reported.

So far, no takers.

The political stakes are such that if BP wants out and cannot find another buyer, Tony Wakeham will take more than 10% equity or otherwise put the province on the hook for more risk to make the deal more attractive to other buyers.

Buckle up.

This is where it gets fun.

That $1.4 billion after costs might shrink even smaller.

And things could get more tangled for the provincial government.

One option already under discussion, as AllNL explained this week, is for Equinor to front GNL the cash. They then pay the loan back through GNL’s earnings as a shareholder, presumably with interest.

So maybe not $1.4 billion.

That means for a while, Newfoundland and Labrador would get nothing at all in revenue. Once the thing hits payout, then GNL could collect dividends like any other operator on top of the money it collects through the royalty regime.

Of course, Equinor would not front the cash for free. There’d be an interest charge, possibly higher than the markets would want for government bonds. Equinor doesn’t have to take interest or interest alone. They could also squeeze GNL for other concessions on taxes, local content. You name it. Desperate province, politically jammed up with all those workers expecting a couple of years of big paydays, and with the treasury jammed up as well. Those are the pressures that make it hard for a government to shut things down.

We’ve been here before.

Dwight Ball could have shut down Muskrat Falls in 2015. But he didn’t, partly because he personally loved the project and had always backed it but the guv’mint was jammed up financially and - based on the briefings from officials - desperately needed jobs. Plus, in September 2015, Ball had said publicly that we could not afford to let the project fail. So triple the original cost and triple what we would have owed in 2015 had he canned the project, we still don’t have a way to pay for it and the thing doesn’t work.

Danny Williams could have shut down the Lower Churchill in 2009 when no one would buy the most lucrative part of the project in Gull Island. Could have but didn’t because his ego and wild claims overrode everything else. So he and a few others cooked up the scheme for Muskrat Falls, including the nutbar idea to force local taxpayers to cover the full cost, no matter what, plus interest and a new revenue stream - in effect a new tax - for the provincial government.

No one ever asked the finance department how much that would cost.

No one at NALCOR ever did the math on the implications. They just had some half-assed assumptions that Wade Locke naively repeatedly publicly as his own.

BRINCO got into a jam in 1969 and so Hydro-Quebec got an automatic extension on the original 1969 power contract in exchange for guaranteeing the bondholders on delivery of the project. Then in 2024, Andrew Furey - giddy with huge ego, little knowledge - and hemmed in by the financial mees he inherited and made worse by his own bungling, gave Hydro-Quebec a slightly warmed over version of the 1969 give-away. More importantly, Newfoundland and Labrador is in Labrador a very junior partner in energy projects on its own territory using its own resources.

Getting sucked into BDN for 10% equity or more would fit the pattern.

After all, as the local Brain Trust figures it, the public doesn’t care about public finance, debts, deficits and all that stuff.

And that thinking - plus a bunch of other things - plagued the Liberals from 2016 onward and put them in the opposition offices last year.

The bigger concern for Newfoundland and Labrador is that a string of decisions over the past 20 years has wiped out all the gains from the Atlantic Accord in 1985. Ottawa has slowly clawed back its control of the offshore thanks to provincial political weakness and short-sightedness in exchange for cash. This BDN proposal to front the provincial government money, while extracting concessions basically makes it impossible for the government that under the Accord should be controlling the offshore to do so in the public interest. The same fundamental problem with Andrew Furey’s Labrador folly is the fundamental problem with the offshore. This latest deal might well finish the job.

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Related:

“The Atlantic Accord: background to the 1985 agreement”

“The 2005 and 2019 federal-provincial agreements”