December 10, 2014
The Liberal government’s pre-emptive decision to ban high volume fracking in the wake of an independent commission’s report that simply recommended going slow has attracted a lot of flak, in both Nova Scotia and across the country. At home, it has become a cause celebre for the Chronicle-Herald and the provincial Conservatives. Further afield, media commentators and some politicians, including Saskatchewan’s Brad Wall, have criticized both Nova Scotia and New Brunswick, which is also moving towards a ban. The gist of their argument is that equalization-receiving Maritime provinces have no business banning fracking for oil and gas when provinces like Saskatchewan and Alberta have been fracking away, keeping the economy humming and the equalization coming. They imply it is our duty as Canadians to frack for gas or oil, no matter the cost. It was only a matter of time before the neocon think-tanks joined in the piling on, so this week’s joint effort by the Fraser Institute and the Atlantic Institute for Market Studies (AIMS) came as no surprise.
The title, Nova Scotia, New Brunswick and the Equalization Policy Crutch summarizes the neocon belief that equalization – which is designed to ensure comparable levels of public services at comparable rates of taxation to all Canadians – is somehow a brake on economic development. I use the word “belief” advisedly because, although frequently asserted over the years, the statement has never been accompanied by evidence. Indeed, the circumstantial evidence runs in the other direction. History presents us with a steady stream of politicians – Smallwood, Stanfield, McKenna, Williams, Graham to name a few – who struggled with varying degrees of success for economic development that would lead to greater fiscal self-sufficiency. So far, as the less-than successful efforts of Smallwood, Stanfield, McKenna and Graham demonstrated, the only sure fire way yet discovered to achieve that goal is to be sitting on a wealth of natural resources like oil, gas or potash. When equalization was introduced in 1956, seven provinces – Newfoundland, the Maritimes, Quebec, Manitoba and Saskatchewan – were eligible to receive payments from Ottawa. Now, thanks to oil, gas and potash, Newfoundland and Saskatchewan have dropped off the list of equalization receiving provinces (ERPS). Ontario has joined the ERPS but with the price of oil plunging and bringing down royalties with it, that situation is likely short-lived.
Given that history, it is counter-intuitive to think that any provincial leader would eschew significant resource development to preserve a certain level of equalization payments. Nonetheless, the researchers from AIMS and the Fraser find in the anti-fracking Liberal governments of Nova Scotia and New Brunswick further support for their credo about equalization. Why, the neocons wonder, would these two hard-up governments turn down the investment, jobs and revenues that would come from “beneficial, at-home, energy development?” While the authors nod in the direction of the strong public opposition to fracking – especially in New Brunswick – as a possible explanation, to them the real culprit is the federal equalization program “which provides incentives for political actors to allow anti-prosperity development policies to flourish.”
The incentives argument is 100% wrong. The equalization program actually provides an incentive for resource development by including only 50% of resource revenues in calculating a province’s eligibility for equalization. That means that $1 in resource royalties goes into provincial coffers but only 50 cents in equalization is clawed back. This 50% formula was introduced in 2007, over the objections of the neocons, who argued for 100% exclusion, a development that would have lowered the overall cost of equalization and penalized provinces with limited resource revenues. AIMS and the Fraser may simply be re-iterating their old argument for 100% exclusion of natural resources. Or they may have more draconian reforms in mind – such as cutting it way back or eliminating it altogether. They don’t say.
However, their intervention in the discussion prompts a closer look at the underlying assumptions about the economic benefits that we are supposedly foregoing with the fracking ban. The AIMS-Fraser paper relies on estimates that were essentially dreamed up for the Report of the Independent Panel on Hydraulic Fracturing , aka the Wheeler Report. That report imagined the development over 60 years of 10 trillion cubic feet (TCF) of natural gas -about three times the production from the Sable offshore project – from the Windsor-Kennetcook Basin. Wheeler’s consultants gave the development a “highly speculative” value of $5.9 billion. That seems like a pretty big number, but as economist Michael Bradfield, a member of the Wheeler panel, has pointed out, it isn’t. By the time royalties peak at $209-million a year in 2055, inflation will have eroded the impact to the equivalent of one-quarter of one per cent in the provincial sales tax rate. Put another way, 40 years from now, if we’re still around and wanting to use natural gas, the royalties of $209 million would be less than half the $450 million collected from the Sable Development in 2008. That’s hardly the stuff to alter the balance between the ERPS and the non-ERPS, although the landscape of the Windsor-Kennetcook would have been somewhat transformed by the drilling of 4,000 wells.
The royalty numbers are not the only “highly speculative” contents in the Wheeler report. The panel did its best to ignore the testimony of a retired provincial geologist who doubted the presence of enough natural gas to make the whole effort worthwhile. However, the report does little to dispel such skepticism. The section dealing with the extent of the resource quotes unsourced “published information” to support a claim that the Windsor-Kennetcook Basin has potential gas volumes ranging from 17 to 69 trillion cubic feet. (By contrast, Nova Scotia Department of Energy estimates offshore potential at 120TCF). At a recovery rate of 10%, that would be somewhere between 1.7 and 6.9 TCF, significantly smaller than the 10 TCF imagined in the royalty scenario discussed in the previous paragraph. The authors of this part of the report (both drawn from the industry) stick to this claim, despite the fact that fracking in that particular basin produced no gas. As for other potential reservoirs, they concede that “exploration activity is likely to be limited, at least for the next several years, because technical risks are considerable, little petroleum production infrastructure is in place, and companies see challenges in commencing operations in frontier areas.”
Several commentators who bothered to read the Wheeler report have concluded that given the speculative nature of it all, the controversy is “much ado about nothing.” Would that were the case. It may be there is “no there there” when it comes to onshore natural gas in Nova Scotia, but the symbolism matters, providing more opportunities for the usual cast of characters to put equalization in their cross hairs, along with environmentalists and others who question the petro-state we have become.