If you stand back and size it up, Muskrat Falls is nothing more than one giant bet that future oil prices will match Nalcor’s high expectations.
According to Nalcor’s calculations, a long-term oil price of $135 per barrel is needed to produce Muskrat’s much-touted $2-billion advantage.
This so-called $2-billion advantage is not a “fact,” as was recently claimed by one Dunderdale minister, but rather the product of calculations based on certain assumptions — one of which, by the way, is that Muskrat will come in on budget.
An even more serious problem is that $135 per barrel is much higher than the growing worldwide consensus on future oil prices, which generally puts Brent long term at about $80 to $90 per barrel (or lower).
Of course, $80 to $90 oil would seriously lower the province’s oil royalties, undermining not only our credit worthiness for projects like Muskrat but also our ability to service our existing debt and provide public services at current levels.
This lower price consensus recognizes the long-term impact of the shale oil/gas revolution.
This revolution, which continues to escalate worldwide, has really taken root since the Williams government unveiled its Energy Plan in 2007. And since 2007, people and institutions all over the world have been forced to radically modify their views and plans in light of this fundamental change in world energy markets.
But not in Newfoundland — the Dunderdale government’s position on all this is simple: we have inherited the Williams 2007 plan and we are going to implement it.
This peculiar myopia was in full display recently when the Dunderdale administration happily agreed to sell Nova Scotia Muskrat power at 4.2 cents per kilowatt hour (kWh). That’s an amazingly low price given expectations six or seven years ago.
For perspective, 4.2 cents per kWh in today’s money is, after all, not much more, in real terms, than Quebec pays under the Upper Churchill contract.
And it is in sharp contrast to the 40 cents per kWh it will cost Nalcor to generate and deliver this power to Emera — not to mention the 40 cents per kWh that Newfoundland ratepayers will pay Nalcor for Muskrat power.
But we can hardly blame Nova Scotia for forcing a 4.2 cents per kWh price on us, because they can make a good case that 4.2 cents is what they would pay for U.S. electricity generated using shale gas over the 35-year life of that province’s Muskrat contact.
Now, to generate electricity for a cost of 4.2 cents per kWh down in the States, utilities cannot afford to pay more than say $3 per thousand cubic feet for the natural gas needed to run their generating plants — which in energy terms is like getting a barrel of oil for about $20.
Cheap shale gas together with increased shale oil supply is simply incompatible with Nalcor’s assumed high oil price world.
And if Nalcor’s high oil price scenario turns out to be wrong, then we will truly regret doing Muskrat.
Throw in significant cost overruns at Muskrat and you would have the financial version of the perfect storm.
We are getting ready to roll the dice at a very high-stakes table and the consequence of losing that bet would be catastrophic.
But as long as the banks have not formally signed off on the money, there is still hope.
Maybe some leading New York bankers will point out that Muskrat’s economics don’t make sense anymore, so count them out.
Or maybe an independent engineering firm, doing due diligence for some major financial house, will point out that there is a fundamental issue of constructability with regard to the North Spur.
One thing for sure, any such reasoned analysis will come from outside the Williams/Dunderdale loop.
Cabot Martin writes from St. John’s.