Near-doubling of offshore revenue saves N.L. from financial abyss

Newfoundland and Labrador is back in the oil game, with hundreds of millions in unexpected revenue likely saving the cash-strapped province from a financial abyss.

"We'd be screwed," professional chartered accountant Larry Short said Thursday, referring to what the province might be facing if it had not collected a windfall of nearly double what it had expected in 2016-17.

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Finance Minister Cathy Bennett delivered a budget Thursday that forecasts an uptick in oil revenues as continuing in the upcoming fiscal year, with nearly $900 million expected to flow into the provincial treasury slightly less than last year's tally.

"I think we'd have to have massive layoffs" if the modest turnaround in the oil sector did not materialize, Short added.

'We're optimistic'

Instead, Bennett announced Thursday there would not be massive public sector layoffs included in the 2017-18 budget plan, and that the province was ahead of the curve in its long-term plan to return the province to surplus by 2022-23.

"We are optimistic about the future of our offshore oil industry," Bennett said in her budget speech.

But Bennett stressed the province continues to have a spending problem, and will not rely on the volatile oil industry to manage the tight financial affairs of the province.

She said the province needs a government that can separate the choices that must be made to reduce spending from the potential injection of oil cash.

"We are grateful that it continues to help us," she said, "but we must continue to reduce spending in the years ahead."

Higher average price for oil

It's a modest turnaround for a province that became dependent on oil revenue, with yearly royalties peaking at $2.8 billion a decade ago.

But the royalty spigot nearly dried up two years ago when oil prices plummeted and production dropped, forcing the province into what some are calling the worst financial crisis since Newfoundland and Labrador joined Canada in 1949.

However, prices have recovered faster than expected, and ended the year at nearly $15 US higher than initial projections.

This, combined with a favorable exchange rate and higher production, drove royalties from a forecast of half a billion dollars when Bennett delivered her first budget a year ago, to a revised figure of $962 million by the time all the royalty payments were counted.

The province has built its 2017-18 budget on an oil forecast of $56 US, which is significantly higher than the $40 originally set in last year's budget.

Bennett called this a "prudent estimate," but cautioned that "we know too well the volatility of oil, so we are estimating cautiously."

But the long-term outlook for oil looks promising.

The Hebron oil field is scheduled to go into production in late 2017, one of "a number of future developments" in the offshore, Bennett said.

But the nature of the agreement to develop the Hebron field means royalties from that project will not significantly bolster royalties for years to come.

"The treasury will very little benefit early on," said Bennett.

The province's first producing oil field, Hibernia, went into production almost 20 years ago, and is responsible for the vast majority of royalties.

The province expects to collect $700 million from Hibernia this fiscal year, with that figure peaking at more than $900 million in two years.