Regulation or Moratorium? New Brunswick’s Fracking Future

Shale gas development is a contentious issue in Atlantic Canada. Public concerns over fracking encouraged Newfoundland and Labrador’s (NL) Progressive Conservative government to impose a moratorium and, similarly, the newly elected Nova Scotia (NS) Liberals promised continue the province’s ban on fracking.

In New Brunswick (NB), where seismic testing is determining the possible opportunities for shale gas development, this issue has become an even hotter debate topic.

NB’s Progressive Conservative government asserted that seismic testing will continue and the opposition Liberals–with support from local Aboriginal leaders and other opposition groups–have recently renewed their call for a fracking moratorium.

While there are serious concerns that must be addressed, however, a fracking moratorium is not a sound policy route: there is a risk of shutting down the debate on what could be a major boost for Atlantic Canada’s economy.

The principal public concern surrounding fracking is the contamination of drinking water. Some observers suggest that the fracking process could contaminate drinking water and damage water tables from which people draw their wells. Water contamination is a serious concern for individuals for obvious reasons and, as such, due consideration must be given. There are others, though, who argue that this is not necessarily the case (although, this is, in and of itself, another debate).

However, a moratorium is not an appropriate policy route to deal with these concerns for two reasons.

The first reason is that banning fracking would discourage companies from exploring for possible shale gas opportunities. NB’s shale gas reserves are still largely unknown and not exploring what the province has available would be an irresponsible policy.

The second reason is that a moratorium prohibits constructive discussion on the issue. In other words, banning fracking gives more legitimacy to the anti-shale gas side, which could result in the destruction of legitimate arguments from the pro-shale gas side.

Regulation, rather than moratorium, is a much better policy tool for government to use in dealing with the fracking industry.

Adrian Park, from the University of New Brunswick, recently published an article that notes jurisdictions in the United States that have experienced horror stories associated with fracking are by and large those with weak regulations. Park’s article also points out that those jurisdictions that have developed the resource alongside strong regulation, such as North Dakota and British Columbia, have experienced far fewer publicised horror stories.

British Columbia, for example, requires oil and gas companies to ensure there are no adverse effects on the quality or quantity of water where development is happening. The province also has the Surface Rights Board (SRB), which requires natural resource companies to compensate landowners for damages resulting from resource extraction.

Ultimately, other governments must follow-suit, especially in Atlantic Canada where the economic possibilities from shale gas development are largely unknown. North Dakota and British Columbia are success stories in the fracking industry because they chose a policy route that allowed the industry to develop in a safe manner: they choose to regulate and have the discussion rather than close the debate.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

For Sale: Hibernia

To date, Hibernia is Newfoundland and Labrador’s (NL) crown jewel of active oil fields, outperforming White Rose and Terra Nova in oil production, while also being the oldest of the three. Furthermore, Hibernia is the type of overachiever that everyone can be happy with: operators, partners, shareholders, and, of course, the provincial government, which receives royalties based on oil revenues.

Recently, however, the federal government–which owns an 8.5% stake in Hibernia–expressed interest in liquidating this asset.

This is, perhaps, an effort to reduce the federal deficit, as well as a response to the fact that the oil field in which Hibernia operates reached peak production nine years ago. In addition, selling its share allows the federal government to reallocate its risk accrued through production- and oil-price-volatility. Whatever the reason, the province is interested in purchasing this asset at Fair Market Value (FMV). The federal government, however, is requesting over $1 billion.

The question, which now much must be posed, is: Does the provincial government’s interest in Hibernia constitute a smart investment for the province?

Hibernia has long outlived its expected field life (although, as of September it still produces over four million barrels of oil per month). Technology has advanced significantly since the discovery of NL’s oil reserves in 1997, however, it is important that the province’s technical staff consult Hibernia’s viability with the operator, ExxonMobil, and its requisite players, including drilling and completions, subsurface, and subsea departments.

Even after extensive consultation, though, it may be difficult to reach a complete understanding of Hibernia’s real asset value.

Crude oil prices are volatile and, while prices remain stable, several traders are bearish on oil’s real value. It is likely, however, that the province will aim for Hibernia’s oil to be trade on futures markets and through forward contracts to hedge risk.

The last point relates to the province’s oil dependence.

In the past, miscalculating oil prices and production levels either generated, or increased, NL’s budget deficits. Is it, therefore, smart to allocate additional government money on a resource that the province is highly dependent on when much of rural NL remains underutilized?

As NL’s government moves forward with its multi-billion dollar Muskrat Falls project in Labrador, it is clear that there is a strategy for, and willingness of, the Progressive Conservative government to take ownership of the province’s energy future. This negotiation will be one of significance for the province and, while it may not be quite as interesting without former Premier Danny Williams as the province’s lead negotiator, it will be worth monitoring.

Tyler Power is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Beyond Moratorium: Hydraulic Fracturing’s Future in Newfoundland and Labrador

Hydraulic fracturing–otherwise known as, ‘fracking’–has become a major topic of debate in policy circles, scientific discourse, and popular discussion. This method of extracting oil and gas, used since the 1940s, involves pumping a mixture of water, sand, and various chemicals into bedrock in order to extract the desired resource.

Fracking south of the border inspires much of the debate within Canada. The United States is set to achieve energy independence in an estimated twenty years, largely because of shale-gas extraction, as technological innovation makes it profitable to extract resources that previously were not worth extracting.

Now, the debate rages in Newfoundland and Labrador (NL). The provincial government recently announced a moratorium on hydraulic fracturing after proposals to extract oil and gas on the province’s west coast arose. Government officials cited the need for additional review and regulation as reasons for implanting the moratorium.

As with all debates concerning resource development, the question is not, ‘are there environmental harms?’ Most human activity–farming, building dams, deforestation, etc.–inflicts some environmental damage. Rather, we must ask, “Do the benefits outweigh the harms?”

What are the benefits of hydraulic fracturing in NL’s context?

First, it would provide an economic boost to a part of the province left behind in NL’s offshore boom. Oil and gas extraction would create high-paying job opportunities for locals and reduce dependence on government transfer programs. It would also drive growth in the region and increase government revenues, contributing to potential future budget surpluses.

Nevertheless, government should learn from its past mistakes in dealing with revenue from hydraulic fracturing. NL’s government dramatically increased public spending when offshore oil royalties increased, making services including healthcare and education dependent on a potentially volatile source of revenue. Fracking royalties, therefore, should not justify further spending hikes.

Regarding fracking’s environmental impact, water is the most common concern: hydraulic fracturing requires large amounts of water to extract resources and purportedly threatens local water supplies when ‘fracking fluid’ leaks.

If water miles below the Earth’s surface is contaminated, there is a less chance of public harm; however, if fracking affects surface water, there is an obvious danger to the drinking water supply. Preventing such pollution should be among the priorities of NL’s regulators.

Concerns about both ecological sensitivity and ecotourism also exist. Regulators must determine a way to monitor the effects of fracking on neighbouring ecosystems and punish firms that destroy public property.

It is conceivable that hydraulic fracturing could threaten tourism about Gros Morne National Park, which one company proposed drilling in. However, the need for a park-specific ban does not necessitate a province-wide ban. And, within Gros Morne, it might be possible to restrict fracking and its potential externalities to Green Point, the proposed development site.

In advancing with hydraulic fracturing, the NL’s government should balance smart regulations that minimize externalized harms while facilitating economic growth. After revisiting its regulations, the province should consider allowing the technique and add fuel to the fire of its economic ascent.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute