Offshore Newfoundland – Bigger And Brighter Than You Could Imagine!

As of late, the media is saying a lot about Newfoundland and Labrador in regards to the oil and gas industry.  Headlines have been heralding the end of the province’s golden age of production for months.  Don Mills, CEO of Corporate Research Associates, was quoted by CBC in the beginning of May as saying, “People are a little delusional in this province in terms of how well the economy is going.”

This week, Wade Locke from the Department of Economics at Memorial University gave a presentation at the NLCA “Lunch N’ Learn Session” entitled “The Price of Oil and its Implications for the Newfoundland and Labrador Economy.”  Locke carries the message that even though short term indicators display a general economic downturn, Newfoundland and Labrador’s economy is doing quite well—both historically and in comparison to other provinces.  He says, “I see a lot of people making lots of statements with this kind of stuff which have no basis in reality, and no basis in fact.”  To address the naysayers, Locke’s arsenal is prepared with statistical information about how oil and gas influences other aspects of the economy, and vice versa.

CBC also quoted a MUN economist May as saying, “Technically speaking yes, we are in a recession.  When we define a recession, it’s two successive quarters with negative growth of GDP—we’re there.”  However, even with this definition, there is no data collected at the quarterly level in any province to support that standpoint.  Locke claims anyone would be hard-pressed to objectively make the case that the economy is experiencing anything other than a normal cyclical downturn as projects naturally come to their end.

Locke also claims that we have not reached peak oil.  The top projects in the industry right now are Hibernia, Terra Nova, White Rose, and Hebron.  Although the first three have all produced over half of their reserves, Hebron has not yet begun production—and is projected to produce 707 million barrels of oil.  He states that there are 17 years more left during which offshore should produce annual production at least as high as we are right now—Hibernia, 40 million barrels/year; Terra Nova, 18 million barrels/year; and White Rose, 13 million barrels/year.  None of those projections include the potential involved with the $559 million bid by ExxonMobil, Suncor Energy, and Conoco to explore the Flemish Pass or the potential offshore Labrador.

However, one might point to the fact that capital expenditures per capita in Newfoundland and Labrador exceeds that of all other provinces except Alberta, and the most our province spends on is health care.  For 2015 – 2016, health care expenditures in Newfoundland and Labrador sit at 39.8 percent.  In 2012, provincial spending in health care was 34.1 percent above the Canadian average.  Why is that?

Health expenses increase incrementally with each age group in the province.  For example, the 20 – 24 age bracket spends $2,244 in health care.  The median age in Newfoundland and Labrador is 44.6, compared to the 40.4 median age of Canada.  Potential retirees began to exceed new entrants into the labour force in 2006, and the numbers have been climbing ever since due to outmigration.  Currently, the province’s labour force consists of 56,000 potential retirees in the 55+ age range and 34,900 new entrants.  The age bracket of 55 – 59 alone spends $4,667 in health care—over double what new entrants spend.  Not only does the older population need more health care but, the older it gets, the more health care spending it will need.  If 55 – 59 continues to work another 10 years, their health care expenditures will have nearly doubled again to $7,782.  Even though health care is a larger drain on the economy in Newfoundland and Labrador than in the rest of Canada, it does not mean that this recession is anything more than a normal dip in the economic flow.

When it comes to media coverage of the economy, Locke makes an interesting point:  If the economy is set to bounce back from this recession, why worry about what the media is reporting?  “I was speaking to some financial guys the other day,” Locke states.  “They said, ‘If we believe you’re crooks, … we wouldn’t give you our money to invest.  It doesn’t matter whether you’re crooks or not—it’s a matter of whether I believe it.’  Perception is reality, without a doubt.”

While Newfoundland and Labrador has its economic challenges, it still has a bright economic future ahead in oil and gas.  “If we are to plan now and then act strategically in order to realize our future potential, then we MUST understand the true nature of the economy that we are operating in,” says Locke.  “Newfoundlanders and Labradorians need to have a discussion about services that we want and are prepared to pay for—that is, we need a discussion of what defines us as a social entity.”