When Memorial University economist Wade Locke saw studies by a renowned Canadian economist that said the province’s royalty regime unfairly subsidizes its offshore oil industry, he questioned those conclusions.
His disbelief touched off eight months of research, math and writing by Locke in his spare time.
The result: a 154-page study entitled “Do Newfoundland and Labrador Royalties Subsidize Offshore Oil and Gas Investments?”
The short answer is no.
Locke’s study was released earlier this week by the Leslie Harris Centre of Regional Policy and Development, and is available at: http://www.
Locke said the province’s oil royalty regime works just fine.
“It seems to be working for all the stakeholders involved — the government is getting a reasonable share, the industry is getting a fair share.
“There seems to be a fair sharing of risk and a fair sharing of returns.”
Locke said the province’s prosperity is directly tied to the offshore oil industry these days.
Oil royalties account for more than one-third of provincial revenues — and are projected at almost $2.2 billion in 2010-11.
“We don’t want to do something frivolously based on incorrect information that can destroy or reduce the contribution that those royalties can make to our future prosperity,” said Locke.
In the past year, University of Calgary economist Jack Mintz has co-authored a pair of studies on oil and gas royalties.
A former head of the C.D. Howe Institute, Mintz is a fiscal and tax policy specialist who advises provincial and federal governments.
“He has credibility,” said Locke. “What he doesn’t have is a good understanding of the Newfoundland royalty system.”
One study, entitled “Taxing Canada’s Cash Cow: Tax and Royalty Burdens on Oil and Gas Investments,” was released in February.
In it, Mintz recommended a single, flat rate similar to Alberta’s pre-2009 oil sands royalty of 25 per cent.
His report said Newfoundland has a complex, multi-tiered royalty regime that encourages companies to front-load the costs of developing oil projects.
“It’s much better to have a simpler, cleaner system,” said Mintz in a Telegram article published in February.
“Make it simpler, get rid of all these tiers, allow full cost deduction and have just a single rate that’s applied to collect the rents.”
When Locke crunched the numbers, he found problems with the way Mintz modelled the royalty system and applied tax credits.
“He didn’t have the in-depth understanding needed of the offshore oil and gas royalty system to be making the claims he made.
“That’s evidenced by the fact that he made a number of serious mistakes in terms of how he modelled and how he analyzed the offshore oil and gas sector here in terms of the royalty system and in terms of risk.”
Locke refutes Mintz
The Newfoundland and Labrador Oil and Gas Industry (NOIA) shares Locke’s dim view of the Mintz studies.
NOIA said the notion of provincial royalties subsidizing the oil industry is certainly news to the industry.
“That’s not a view that would be shared by anybody in the oil and gas business here,” said Bob Cadigan, president and CEO of NOIA.
The association represents about 500 companies working in the province’s offshore oil industry.
“I think he (Locke) has clearly refuted a piece of work that did have some flaws,” said Cadigan. “Otherwise, these flawed studies would be in the public domain … and would cast a bad shadow over the industry here.”
Cadigan said it’s much more expensive to drill offshore wells off Newfoundland than onshore wells in places like western Canada — and the risk of failure is also much higher offshore.
“There’s got to be a return for that.”
Newfoundland has multi-tiered royalty systems for the Hibernia, Terra Nova and White Rose oilfields that provide companies with a rate of return allowance.
Atlantic tax credit
Mintz has also suggested the Atlantic investment tax credit is no longer necessary.
The 10 per cent tax credit applies to capital spending on new buildings, machinery and equipment by natural-resource industries, such as oil and gas, agriculture and fisheries.
It’s available in the Atlantic provinces and Quebec’s Gaspe Peninsula.
Locke fears that tax credit could become a cost-cutting target for a federal government facing hefty deficits.
“It is portrayed as being an unfair advantage in the Mintz paper. It’s not an unfair advantage.
He said getting rid of the tax credit would effectively raise the cost of doing business in the province’s natural resource sector.
If Mintz’s ideas gain political traction, Locke said it could have dire consequences.
“Some of the newfound prosperity we’ve had in the last five years may quickly dry up. I don’t want my children or my grandchildren, or anybody’s grandchildren for that matter, not to have as good an opportunity as they can possibly have, given the resources we have here.”