Royalty bust brings pain to Newfoundland and Labrador

The mighty tide of offshore oil royalties that once flowed to Newfoundland and Labrador has quickly dried up, setting the scene for a budget on Thursday that will likely have a profound impact on public services.

Just as fast as the boom began, the last two years have turned into a royalty bust leaving a big hole in the province's bottom line, and the spectre of big cuts looming over the first budget from Liberal Premier Dwight Ball.

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By the time the books are closed, the government expects to take in $551 million from the offshore fields in fiscal 2015-2016. That'sa far cry from the $2.8 billion in payments that the province saw in 2011-2012.

From the height of the revenue peak, less than 20 per cent of offshore revenue remains. It can no longer be said that Newfoundland and Labrador is oil dependent. These days, the province is in full oil withdrawal.

Offshore oil: from boom to bust.

8 years ago

Duration 0:28

The flow of offshore royalties that came into Newfoundland and Labrador's purse has dropped significantly in the past three years. The Province now expects to take 551 million in royalty payments, down from the near $3 billion it once saw.

Lower prices, lower production

As the price of Brent crude fell in 2015, at one point below US $40 per barrel, so did production on thethree offshore oil fields now in production east of Newfoundland.

According to the provincial government, equipment at each of the Hibernia, White Rose and Terra Nova projects wastemporarilytaken offline in the fall of 2015 for maintenance.

All told, offshore projects in the province extracted 62 million barrels of oil in 2015. That too represents a decrease about 16 million barrels less than in 2014.

Lower prices and lower production meant lower royalties for the provincial government. Revenues dropped $1 billion in one year alone remarkable for a small province that spends about 8 billion each year.

No other revenue item has dropped so significantly. In fact, the government now expects to make nearly as much from fees and fines as it does from the offshore.

A massive shortfall

The royalty bust is the biggest culprit responsible for the projected$2.4 billion deficit the Liberal government will try to tame on Thursday.

The projectionfor the upcoming fiscal year was released in a financial update in December, after the Liberals took the reigns in the provincial election.

It's the biggest deficit threat the province has seen in more than 20 years. A $2.4 billion deficit would total sevenper cent of the province's GDP.

It has already forcedFinance Minister Cathy Bennett and Premier Dwight Ball to loosen the language around some of their election promises.

The Liberalspromised not to raise the provincial sales tax and to not to lay off any public sector workers. Now, the government is refusingto rule anything out.

"There is not one single choice in this budget not one that is a happy one," Bennett said in an interview with the CBC's David Cochrane.

• Not a single happy choice in upcoming budget, Cathy Bennett admits

"Every decision we make will impact somebody somewhere and probably not in a good way," she said.

Lower for longer

Premier Ball on Newfoundland and Labrador's economic woes

9 years ago

Duration 8:03

N.L. Premier Dwight Ball discusses the state of his province's economy and what he wants from the federal government

As the Liberals embark on their three-act plan to tackle the deficit, they'll do so without much help from the hurting oil and gas sector.

Oil-relatedrevenues wereonce the backbone of the provincial budget. Taking in more than income and sales taxes, offshore royalties accounted for 31 per cent of total revenues in 2011-2012.

The history of relying on oil prices as a significant proportion of our revenue has been flawed- Finance Minister Cathy Bennett

By the time the numbers for 2015-2016 are all calculated, the finance department expects that royalties will contribute just nineper cent.

Oil prices are now forecast to be lower for longer. The National Energy Board doesn't expect Brent crude to rise to US $80 until 2020.

Two additional factors are troubling for long-term planning: all three of the large offshore projects are closer to the end of their lives than the beginning.

The Hebron project, which is scheduled to come online in 2017, won't be able to immediately pick up the slack. Itwon't start paying a sizeable royalty rate until 2023, according to Bennett.

All that means that offshore oil bonanza that Newfoundland had loved might not return for quite some time.

Bennett admitted in January that a real change in thinking is needed.

"The history of relying on oil prices as a significant proportion of our revenue has been flawed," she said.