Danny’s war

He says he wants Newfoundland to be the next Norway. But is he turning it into the next Venezuela?

Friends of Danny Williams say he does business the way he plays hockey. “He’s not very big, but he’s a fearless individual,” says former law partner Steve Marshall, who skates with the premier of Newfoundland and Labrador—who is also the former captain of the Oxford Blues and St. John’s St. Bon’s—twice a week. “If you’re taking him on, you better be prepared.” The rec hockey they play doesn’t have referees, but if it did, well—“I can’t lie to you and say he wouldn’t be up there in the penalty minutes,” Marshall says. “He certainly wouldn’t be a candidate for the Lady Byng.”

Three and a half years into Williams’ first term, many would argue a referee is just what he needs. A year ago, he mixed it up with no less an oil giant than ExxonMobil, delaying a plan that would have seen it develop the Hebron–Ben Nevis offshore field, and Williams still hasn’t budged in his quest for a better deal. “We can’t afford not to wait it out,” he says. More recently, his decision to delay the expansion of the Hibernia field in January, citing a lack of information in the application from Exxon and its partners, alarmed some business leaders and analysts who fear his tactics are scaring away investors. Comparisons to iron-fisted Hugo Chavez, the vocally anti-capitalist president of oil-rich Venezuela, debuted in the national media a year ago, and they seem to have stuck.

As Williams’ heated standoff with Prime Minister Stephen Harper over equalization continues to brand the premier as a maverick, oil producers have begun to move on to projects outside Newfoundland. But the premier’s hold on the province still verges on a personality cult: polls put his popularity rating at 70%. Is “Danny Millions,” as he’s known to locals, simply running the province like the growth-minded entrepreneur he once was? Or will his tactics—called too uncompromising by some, downright foolhardy by others—hurt Newfoundland?

With the energy sector at a crossroads, the premier does have a vision for the future, but no official plan—yet. And the decisions he makes now could determine Newfoundland’s ability to become a “have” province for the first time in its history.

On April 3, 2006, a consortium looking to develop the Hebron–Ben Nevis oilfield, which was discovered fully 25 years before, walked away from talks with the Newfoundland government. It was the second time negotiations over the development—worth between $3.5 billion and $5 billion—had collapsed in four years. The partners (Chevron, ExxonMobil, Petro-Canada and Norsk Hydro) said the decision was unanimous, but Williams singled out Exxon for blame, citing its last-minute calls for a tax break and a refusal to meet the province’s demands for an equity stake. “If ExxonMobil is not interested in developing this project on fair terms to the province when the other partners appear to be, then move off,” Williams said at the time. He urged Exxon to sell its 38% stake in the consortium or risk being kicked out by “use it or lose it” legislation. Since then, the oil has stayed in the ground. “We’re at a point,” Williams now declares, “where we finally have to say, ‘OK, we need to get more from our oil and gas industry.’”

To those who know him well, Williams’ stare-down with the world’s largest oil company was hardly surprising. An entrepreneur who took a $2,500 loan and created Cable Atlantic—one of Atlantic Canada’s largest communications companies—Williams has been an unshakable bargainer since his lawyer days. Some in the business world say that he makes a habit of being too tough. “He’s a very vindictive guy,” says one Canadian CEO, citing the premier’s recent personal attacks on the prime minister in a series of national newspaper advertisements. “If you take him on and you challenge him, or say anything about him, he’ll come after you.”

Williams doesn’t feel he’s been too hard on Exxon. “Hardball? It’s more fair ball, to be honest with you,” he says. “Yeah, it’s hard, I suppose, because we’re not rolling over and saying, ‘We’ll take whatever you give us, thank you very much Mr. Oil Company, we’re very grateful that you’re here.’ We’re seeing it as a partnership.”

To most Newfoundlanders, Williams’ stance has made him even more the white knight than they thought they elected. After all, he campaigned on a platform of “no more giveaways” of resources. In late 2004, he famously tore down the Canadian flags outside provincial buildings—a gambit in his ongoing brawl with then-Prime Minister Paul Martin over equalization clawbacks on offshore royalties.

It’s easy to see why such tactics resonate with Newfoundlanders. The province has suffered from resource mismanagement crises since at least the 19 century, when the payoff from a railway built by a foreign company failed to live up to expectations. Residents still ache over the Upper Churchill Falls hydroelectric project—the 1960s saw then-Premier Joey Smallwood sign a deal with Hydro Quebec that has netted the Quebec utility billions while Newfoundland gets peanuts. The cod fishery, one of the biggest in the world 60 years ago, vapourized under the watch of the provincial and federal governments. In 2000, Premier Brian Tobin demanded Inco process ore from Voisey’s Bay inside the province, but Tobin’s successor, Roger Grimes, allowed its shipment to Sudbury in exchange for a smelter that still hasn’t been built. “Part of the reason people feel so passionately about offshore oil and gas here is that we recognize the resource is limited, and out of the last couple of hundred years this is our only chance to realize significant revenues,” says Jeff Webb, assistant professor of history at Memorial University in St. John’s.

Some of the benefits are already being felt. Though oil and gas exploration began off the Grand Banks in 1966, it took until 1997 for the province’s first project, Hibernia, to begin producing. Two other fields, Terra Nova and White Rose, came online in 2002 and 2005, respectively. The three fields are responsible for almost half of Newfoundland’s GDP growth of 48% over the past 10 years, and productivity has jumped an annual average of 3.2% over that same time frame—twice the national pace. The offshore oil industry has helped revitalize St. John’s; for the first time in years, professionals are finding jobs and purchasing million-dollar lakefront homes. And it has contributed to above-average economic growth for the province. Its 4% growth for 2007 is expected to be tops in the country this year, according to RBC chief economist Craig Wright.

For all Newfoundland’s recent gains, however, it’s still saddled with a $12-billion debt that has been accumulating since it joined Canada in 1949. That is the highest per capita provincial debt in the country. As well, the province has weak infrastructure and one of the highest tax rates in the country. It also has the fastest-declining population, as a 14% unemployment rate drives many Newfoundlanders to leave each year for work elsewhere. (A fall job fair promoting opportunities in Alberta attracted 9,000 to a St. John’s hotel.)

For the offshore oil and gas industry on which the province’s hopes are pinned, the delays at Hebron and the Hibernia expansion (called Hibernia South) have come at a critical time. Though the Newfoundland government just approved Husky’s application for a major expansion of their White Rose field, which will see production increase from 110,000 to as much as 137,000 barrels daily, total production of the existing projects is expected to peak in 2008. There have been no new discoveries in more than 20 years, and capital investment is down—$1 billion in 2006 compared with $2.7 billion in 1999. Chevron and Exxon recently announced that drilling in the Orphan Basin will be put on hold after the completion of their first well. As a result, RBC’s Wright predicts, Newfoundland will see GDP growth slow to 1.5% in 2008, thanks to dwindling investment in and construction on the megaprojects.

Williams and his fans are betting on the Hebron consortium returning to the table as oil prices increase, but there’s no sign that will happen soon—some of the partners have moved staff out of the province. Brian Maynard, vice-president of the Canadian Association of Petroleum Producers, which represents companies involved in Canada’s upstream oil and gas industry, says the current level of activity isn’t sustainable and doesn’t bode well for the future. “The level of exploration is down so low that the long-term trend is not good,” he says. “Nobody’s drilling any new wells.”

Why so little exploration? Maynard says that CAPP’s member companies can’t work in an uncertain investment climate that’s still lacking a natural gas royalty regime and an official energy plan. “Our companies spend big dollars,” Maynard adds. “The cost of drilling the well in the Orphan basin is US$200 million, and if they found something it would take years and years to develop. So anybody who’s going to be exploring or drilling needs certainty. They need to know the rules of the game upfront, and that the rules of the game won’t change.”

Williams says that a gas royalty regime, long awaited by companies looking to develop the Laurentian Basin, is in its final draft form. But an official energy plan is more uncertain. It was part of his Progressive Conservative party’s election platform in 2003, but its release has been pushed back several times. The premier now says he’s hoping for a late spring release at the earliest. “It’s an evolving, dynamic document,” he adds. “We don’t want to finalize it until we feel we have all the various components in order.”

Because of the capital intensive nature of offshore oil development, CAPP wants Newfoundland to implement competitive fiscal and royalty regimes, taking into account what other jurisdictions are doing worldwide. Maynard cites the investment climate that’s made Western Canada so successful as an example, with its stable royalty structures, corporate tax reductions, infrastructure development programs—and sustained levels of exploration activity.

A recent report by Wade Locke, an economist at Memorial University, concludes that the Hebron and Hibernia South delays could have huge implications for the province’s future—and its ability to ever become a “have” province. According to Locke’s estimates, based on an assumed real oil price scenario of US$50 per barrel, Newfoundland can expect to receive at least $15 billion in royalties and taxes over the next 20 to 25 years from the existing fields, and up to $23 billion should Hebron proceed in a timely manner. With all four fields developed to their full potential, provincial revenue could peak at $1.4 billion in 2012, generate more than $1 billion per year for another 12 years, and $500 million yearly for at least another eight years after that—in total, enough to make the perennial have-not province a “have” within the next five years, possibly as few as three. But that is contingent on Hebron and Hibernia South proceeding—without those projects, provincial revenue from the oil and gas industry will fall to $9 billion from $23 billion.

If Newfoundland wants to realize the benefits, it would help to aim for continuity of development rather than leaving the oil in the ground, Locke says. Ongoing development is something the province has enjoyed until now, and Newfoundland’s offshore goods and services supply sector has enjoyed strong demand for the past 15 years. But now, with no new construction on the horizon, demand is beginning to wane. That translates into more skilled workers leaving for opportunities in Alberta—a trend that will make it more costly to develop Hebron and Hibernia South when or if deals are reached.

Newfoundland’s offshore oil services sector has already felt the impact. Q’Max Solutions, a Calgary-based drilling fluids company, arrived in Newfoundland in 2002 with a contract at White Rose. But it hasn’t had much opportunity to grow since then, says John Meaney, general manager of the company’s East Coast operations. With its current contract set to expire this summer, Q’Max’s future in the province is up in the air. “With Hebron, my guess is that we would have seen the benefit already. Before negotiations ended, Chevron was ramping up its local infrastructure management staff to develop the project and were ready to start considering contracts,” Meaney says. “With Hibernia South, the local economy would be beginning to feel the impact soon.”

Many in the sector are reacting by looking to Western Canada for opportunities, according to Rob Crosbie, chairman of Crosbie Group Ltd., a St. John’s company providing industrial offshore and onshore construction services. “The business that is here has already been awarded, so we’ll have to look elsewhere for growth,” says Crosbie, whose holding company ASCO Canada Ltd. has already established a transportation business in Edmonton. Rutter Inc., a technology and engineering solutions company also based in St. John’s, recently acquired Saskatoon-based Hinz Automation to expand its reach from coast to coast. Doris Conpro, a company that has a joint venture agreement with Rutter, would have sought an engineering and construction contract for Hebron—employing 250 engineers in the process—but can now partner with Rutter on oilsands projects in Alberta. “We had to start focusing on that area,” says Fraser Edison, who heads Doris Conpro and is executive vice-president at Rutter.

Meaney sees the loss of momentum in the industry already. People are reluctant to invest in new equipment, or to look beyond four or five months in terms of hiring policies and planning. “I’m watching every dime I spend,” he says. “What’s available in the short term and long term right now does not look very optimistic for us service providers, and I think in the near future companies are going to start reacting to what’s going on.”

At a press conference on April 3, the one-year anniversary of the Hebron talks’ collapse, Williams said that while he sympathized with local companies feeling the pinch, those criticizing his approach are undermining the province’s position. “If there doesn’t happen to be a job for someone in St. John’s in an engineering firm, that’s unfortunate—I’m not happy with that,” he said. “But there has to be some price paid in the short term.”

Williams says, at least, that he has a vision that’s all about the long term. His energy plan, when released, will extend all the way to 2041, he says—the year the province gets back 5,000 megawatts of power from Upper Churchill Falls that’s currently being sold by Hydro Quebec. A recent trade mission to Alberta saw him give transplanted Newfoundlanders in Fort McMurray a five-to-10-year time frame for when they might consider returning home. By then, he says, there will be opportunities across the province—from Hebron, the proposed hydro project at Lower Churchill Falls, a planned hydro-metallurgical processing plant in Long Harbour, and a possible oil refinery in Placentia Bay. Williams’ goal is to turn Newfoundland into an “energy warehouse.”

He has taken some steps along that path. In the summer of 2005, Williams began restructuring Newfoundland and Labrador Hydro into a corporation that could participate in onshore and offshore oil and gas plays. He hired Ed Martin, a former Petro-Canada executive, as chief executive officer of the Crown utility. One of Martin’s earliest responsibilities was participating in the Hebron negotiations—the province considered buying out Exxon’s stake in the project to give it a way out.

Martin has said that while expanding Hydro’s mandate, he looked to Norway’s Norsk Hydro, which has also made equity stakes a priority. Williams is a Norway fan, too—his post-Hebron calls for “use it or lose it” fallow-field legislation are Norway-inspired, and he travelled there in September to study its model. It’s easy to see why: the Norwegians have built one of the world’s most successful offshore oil industries, producing three million barrels a day, becoming debt-free along the way. The petroleum industry has largely contributed to a US$300-billion government pension fund.

Fallow-field legislation might not be in Newfoundland’s future—passing it would be Ottawa’s call, and Harper has said he won’t back the move. (An angry Williams branded the prime minister a “buddy of Big Oil” when he heard the news.) But Williams has had firm ideas about equity since the Hebron talks—initially, the province asked the consortium for a 10% stake before lowering that to 4.9%. The province also asked for a super-royalty to kick in if oil prices spiked, and for a processing plant in the province. “So the oil is not just load and go—you know, they take it out of the ground and take it away in boats and we never see it again,” Williams says. The premier claims his energy plan will mandate more than a 4.9% interest for the province in any future projects. “We’ll be looking for more than that, but not a huge chunk like the Russian or South American or Asian type of interest,” he says. “They’re modest requests for equity.”

But what form that equity might take is crucial. According to Tom Ebbern, managing director of institutional research at energy advisory firm Tristone Capital, asking for a 4.9% stake might not frighten oil producers away—that is, if Williams’s idea of equity means the province would enter projects as a partner and take on some of the risk, the way Norway has. But if it is just looking for a greater return without investing anything—what governments like Russia’s and Venezuela’s mean when they talk about equity—it will only worsen the province’s situation, Ebbern says.

If the premier does manage to get Hebron and Hibernia South on track, his “energy warehouse” vision for the province might not seem so crazy. With the $23 billion in revenues that would be coming in, economist Locke says, Williams will have enough resources to meet his economic, financial and social priorities for the medium to long term.

The question is whether Williams’s stare-down with the oil companies is helping those priorities along or hurting them. Some in Newfoundland are beginning to speak up about what they see as a lack of meaningful discussion about the future. “What I’ve seen generally happening is a very emotional discussion—you’re either against the oil companies or you’re against the government—and most of the business community is not either way minded,” says Crosbie. “They want the industry to grow.” Q’Max’s Meaney says the public needs to be provided with real data on the industry’s potential, and those in the industry need to voice their concerns. “Right now no one is saying a word,” he says. “It’s all rhetoric that’s coming from the premier, and everybody else is a coward when it comes to speaking up,” he says. “I don’t understand it because everybody has a significant investment down here.”

The most important discussion, though, is the one that might eventually see the premier and oil companies reach a deal. For now, that outcome is uncertain. “We have done everything we can within the principles that we’ve set in order to reach the agreement, and now we’ve said to the oil companies, ‘OK, the ball is in your court,’” Williams says. “‘When you wanna come and talk to us, let us know.’”

by Andrea Jezovit