Oil sparks optimism in Canadian province

Sector's growth has generated massive revenues for Newfoundland at a time when it was facing cuts to traditional industries

A view of the city of St John's from Signal Hill. The oil sector of Newfoundland accounts for 35 per cent of the province's gross domestic product.

ST JOHN'S, Canada // After years of being mocked by central Canada for its economic stagnation, a sense of bullishness now prevails in this provincial capital. St John's, the capital of the province of Newfoundland and Labrador, has enjoyed a decade-long ascendancy as an oil producer, churning out 310,000 barrels a day in 2008, or 13 per cent of Canada's total crude output.

Remove Alberta's oil sands from the total national output, and Newfoundland and Labrador supply roughly 40 per cent of the country's light sweet crude. It is a source of great pride for the 500,000 people who live here, who want their province to reap maximum benefits from its natural resources. Danny Williams, the premier of Newfoundland and Labrador, successfully negotiated a 4.9 per cent equity share for his province on the offshore Hebron heavy oil project, - which is expected to begin production within nine years - from such major companies as ExxonMobil.

Indeed, at least one nationalist joked that if Newfoundland had opted for independence in 1949 instead of the Canadian confederation, it might now be as rich as an oil-producing Gulf state. For Mr Williams, the oil sector emerged at a critical time in the province's history because it was facing cuts to traditional industries. In 1992, Ottawa, which holds jurisdiction over the fishery, introduced a moratorium on cod because of limited stocks, which put 50,000 people in Newfoundland out of work.

Five years later, Hibernia, the first provincial offshore oil project about 300km east of St John's, started production. "So oil development came in at a time when we needed it. There was a big setback," Mr Williams said. "When you take 50,000 people, that's about 10 per cent of our population, so it's made a significant difference." The oil industry now accounts for 35 per cent of Newfoundland and Labrador's gross domestic product. Its contribution towers over such other resource-based industries as mining and fishing, which combined make up less than 10 per cent of the provincial economy.

According to Wade Locke, an economics professor at Memorial University in St John's, the province's GDP now surpasses the national average. This bolsters the optimistic viewpoint of the Canadian Association of Petroleum Producers, the lobby group for oil companies. Paul Barnes, the association's manager for the Atlantic Canada region, said the royalties and revenues flowing to the province have stimulated a huge amount of economic activity in St John's, including rising house prices, new restaurants and port traffic.

Oil "will allow us to experience economic growth that this province has never seen before", Mr Barnes said. Nor is oil viewed as a short-term industry, despite declining production of its three major projects. Mr Barnes said the plan was to eventually tie in smaller fields with the nearby larger offshore platforms to sustain the sector into the future. Meanwhile, the Canada-Newfoundland and Labrador Offshore Petroleum Board, a federal provincial regulator, estimates there are probably three billion barrels of oil that could be found here on top of the current discoveries. That fails to account for the 10 trillion cubic feet of natural gas already discovered and a further 40 trillion cubic feet potentially lying offshore.

Yet for all of Newfoundland and Labrador's oil-driven improvement, there is a downside described by academics as the "resource curse". Many say the province will become susceptible to the negative consequences that afflict oil-dependent economies, like boom and bust cycles. Mr Williams acknowledged there have been short-term employment surges during periods of intense oil industry-related construction, but said oil revenues could be used as a form of stimulus for longer term benefits, including paying off debts, supporting pension plans and improving infrastructure, schools and hospitals.

"So it's basically taking from the profits from a non-renewable resource, taking the benefit of the short-term employment but then trying to convert those monies into industry that will create long-term sustainable employment for Newfoundlanders and Labradorians." Nevertheless, the volatility of oil prices is complicating budget planning. Jerome Kennedy, the finance minister, said royalties in 2009-2010 are expected to drop by more than C$900 million (Dh2.7 billion) because of lower prices and lower production, contributing to a deficit.

The provincial budget estimates a price of US$50 (Dh184) per barrel in the coming year. That sharply contrasts with Mr Williams's August forecast of $87 per barrel when he announced the Hebron agreement. Moreover, there is a deep disconnect between the oil industry and the province. Despite the steep contribution to the economy, it employs roughly two per cent of the population since it is capital intensive. People now talk of two economies in St John's: one real, the other predicated on oil. The latter inflates housing prices and creates Toronto or Montreal-style restaurants in a small city that takes pride in its lack of pretension.

Mr Barnes, however, argues that the actual divide exists between urban St John's, the focus of the activity, and rural Newfoundland. "There's a lot of rural Newfoundlanders who largely can't connect the benefits the oil and gas industry is bringing to the province to some of the benefits they see in their community," he said. These include upgrades to schools and hospitals across the province; the changes in the capital, be it the restaurants and housing prices, are far more visible, suggesting more money stays here.

Still, the fact remains that government officials cannot influence global demand for oil and its subsequent market price, on which Newfoundland and Labrador's fortunes increasingly depend. [e-mail]