Posted June 27, 2014
Imagine for a moment that the search for oil in Nova Scotia’s offshore over the next two years is a roaring success, leading to a prolonged period of further exploration and development. What might be the consequences of such a development? In particular, what impact would it have on achievement of the goals set out in the Ivany report?
1. The big impact on the economy will be slow in arriving. Ensuring that designs provide proper protection against well blowouts will take considerable time. It will be well into the next decade before the oil companies decide on their development plan, receive the necessary approvals, and complete the first production wells.
2. When production begins it will substantially change our economic numbers. The onset of production from the relatively small Deep Panuke gas well has been the leading cause of improvement this year in Nova Scotia. Large scale oil production would have an impact several times as great. Both GDP and export performance would improve dramatically.
3. With it will come substantial royalties to the provincial treasury, especially after development costs have been repaid. In principal this should result in budgetary surpluses and reduced provincial debt. The government of Newfoundland and Labrador (NL) expects Hebron, their most recently announced project, to produce $23 billion in royalties, return on its investment, and corporate income tax over 30 years.
The experiences in other provinces show that politicians find it even more difficult to say no to questionable ideas if there is lots of money around. Alberta has been frequently guilty of wasteful spending. Nevertheless the overall impact on public finances in Nova Scotia is likely to be very positive.
4. There will be new high-paying jobs, although fewer than would be associated with that much GDP from manufacturing or onshore resource development. With the jobs will go population growth as families move in to take advantage of the opportunities.
If NL’s experience is any indication these benefits may be almost entirely felt in Halifax. St. John’s is booming with an unemployment rate of 6.0%. Its population has grown by 22,000 since 2006. Meanwhile the rest of NL has an unemployment rate of 15.4% and the population has dropped by 2,000 since 2006.
5. If the government of the day manages its budgets prudently Nova Scotia will eventually be able to reduce its tax rates and become a more attractive place for companies and their employees to locate.
6. The oil production will probably not change global consumption and therefore is unlikely to impact greenhouse gas emissions (GHG’s).
Those who argue that churches, universities, and others should divest themselves of equity in coal, oil, and gas companies seem to miss this point. The money to buy those shares comes from other investors, not from the treasuries of Shell or BP. Those companies largely pay their bills with cash flow from existing operations.
The most harmful aspect of the divest movement is that adherents think something more than symbolism has been accomplished when a trust or endowment sells its shares. It is much more helpful to the reduction of GHG’s to focus on ways of reducing consumption of fossil fuels.
7. Suppose the oil find is accompanied by commercial quantities of natural gas that can be piped ashore. That could bring greater security of supply and stability of prices to Nova Scotians. Equally important it could bring a net GHG benefit if increased use of gas for power generation accelerates the retirement of coal-burning power plants. Gas-fired power generation is half as GHG-intensive as coal.
8. There will be considerable opportunity for our universities to contribute valuable research on appropriate technologies and materials, and environmental monitoring.
9. The cost of producing energy from wind and solar sources has been coming down. If this continues, and if commercially viable tidal technologies or other new renewable sources are developed, there will be downward pressure on oil and gas prices.
It is not inconceivable that oil could drop below US$75 per barrel in today’s dollars. If so the commercial attractiveness of frontier areas such as the Scotian Shelf will greatly diminish, as will the prospect for robust royalties.
- If a big discovery is announced celebrate with a quick glass of Nova Scotian wine and go back to what you were doing. It could be very good for the provincial treasury but not for many years. It will help but will not by itself solve our unemployment and population problems.
- The employment and population benefits may be highly concentrated in Halifax, doing little for rural Nova Scotia.
- Oil and gas is cyclical, like every resource industry. It is therefore always important to continue the search for other resource opportunities, especially in rural Nova Scotia.