Muskrat Falls could be the perfect storm

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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).

Double whammy

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.

Market price

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.

Geographic location: Muskrat, Newfoundland, Quebec Nova Scotia U.S. New York

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Recent comments

  • H Jefford
    December 13, 2013 - 09:04

    When the Muskrat Falls Power is developed the muskrat falls that ran for millions of years at no cost, will run for millions of years more turning the power generating turbines, providing clean safe and long lasting power for as long as the Churchill river flows, Eliminating the oil fired generating plant at Duffs which is listed as one of the top 10 worst dirty air polluters in the world ! This can be found online. But compared to Duffs generating plant, What does the Coal burning generating plants in Nova Scotia rate at is it also in the top 10 or is it higher When the muskrat falls is developed it will take its place with the Upper Churchill Falls AS THE CLEANEST MOST RELIABLE AND MOST DEPENDABLE SOURCE OF POWER IN THE WORLD

  • snookered
    December 11, 2013 - 20:02

    NLers have been snookered by there own government into proceeding with a project that will by and large need substantial financial subsidy from higher than alternative rates for electricity and/or tax payer subsidies to Nalcor to cove rthe costs of this uneconomic project. In addition, the people of NL have been denied the opportunity to realize the lowest rates for electricity anywhere in 2041. We are now locked into paying very high rates for about 50 years. What a lost opportunity, having waited already over 40 years for cheap Churchill power. The analysis was flawed from the beginning as our Government should have focused on our electricity needs for the next 25 years only as with the 2041 deadline we would have been in a position to have excess very cheap power less than 0.5 cents perkwh for the rest of time. And now we are saddled with a very high risk project that will cost us for two to three generations to pay for. What a disaster thsi project is about to bring on the people of NL.

  • choaking
    December 11, 2013 - 13:11

    I have no reason to believe that Cabot Martin's calculations are incorrect - that said, I'll be damned (weak effort at a pun!) before I pay TEN TIMES what Nova Scotia rate payers will be billed when/if Muskrat Falls power comes on line. Given I live on a windy hill, perhaps I should invest in a windmill - despite regulations which will try to stop me! I'd rather turn the heat off and use battery-operated lighting than see my power bill rise one cent higher than it is now. After all, we aren't all earning what NALCOR's Ed Martin takes home - more than $600-thousand a year, plus perks. And he is - in effect - a civil servant. Taxpayers fund his salary so that he can promote projects that will bankrupt us all. How does he sleep at night?

    • Virginia Waters
      December 11, 2013 - 22:46

      A small wind turbine or rooftop solar panel wouldn't hurt. But the public needs to understand that as ratepayers go fully or partially off-grid, those who don't - or can't - will simply pay more. This massive debt must be serviced. In the event that rates rise so high that they yield diminishing returns, then government will switch to taxpayers in general to make up the difference - i.e. by way of a subsidy to NALCOR. So even those who go off-grid will not necessarily escape the economic fallout from this boondoggle.

  • david
    December 11, 2013 - 11:57

    "Perfect" storm?! Hardly. All it will take is for slightly less-than-ideal (already fantasized) conditions...on any one of several economic, technological, or logistical fronts....and we are completely up a creek. Last one here turn off the lights...that is, if our eventual unidentified masters don't disconnect us first.

  • Dolf
    December 11, 2013 - 11:16

    Strange this loan guarantee confirmation occurred when the Prime Minister was as far away from it as he could get.

  • david
    December 11, 2013 - 09:14

    You don't often see such a festive atmosphere when someone is signing the death warrant for an entire province. At least we still have our self-deprecating, black humour.

  • Corporate Psycho
    December 11, 2013 - 08:46

    Don't worry Mr. Martin. I'm sure the special interests in NL will do fine. The rest of us will be out in the cold.

  • Winston Adams
    December 11, 2013 - 08:28

    The "perfect storm" is the phrase used last week on a TV business channel. It was in reference to world oil prices and the effect of Iran inviting 7 western oil companies back, and the effect of low cost shale oil and gas on reducing oil costs worldwide.They even gave a date for the Perfect Storm as June 2014. This seems to be the date when the talks with Iran would be finalized. Cabot Martin is likely right, things are falling in place for the Perfect Storm against Muskrat. Perfect Storm is the words used by Danny Williams when 3 bidders wanted to buy his cable company, making him a very rich man. A perfect storm may have been his vision for Muskrat power, with Nova Scotia, New England and some island demand, and some sales back to Quebec, but all this dependent on high oil costs, and a robust island demand with no efficiency/conservation measures, for the economics to be feasible. Seems we're headed for some kind of storm. It's not likely to be prefect. Maybe a political storm.