Bridging NL’s Urban/Rural Divide

Newfoundland and Labrador (NL), throughout history, has faced several economic impediments. The most famous of these impediments is the collapse of its cod fishery in the 1990s, which placed the viability of coastal communities in question. For instance, from 1991 to 2001 (following the federal government’s 1992 cod moratorium), NL’s rural population as a percentage of the province’s total population dropped 18%.

The primary driver behind the province’s rural population decline is a lack of employment. NL’s key economic determinants (and their jobs), for instance, are chiefly located in urban areas where employment opportunities are greater. Without taking proactive steps, this trend is likely to continue.

Although there is an emergence of specific industries, such as aquaculture, in NL’s rural areas, the biggest concern is the province’s ‘brain drain.’

Of those in rural communities whom choose to continue their studies, a large portion leave and few ever return home. This creates a vicious cycle, the result of which is a shortage of highly trained individuals in the province’s rural areas (thus, limiting innovation and constraining organizations that would otherwise consider operating rural communities).

There are, however, several potential solutions for reducing the gap between NL’s rural and urban communities and, subsequently, growing NL’s rural economies:

1)      Infrastructural development
2)      Labour market assistance
3)      Encouraging immigration

If you build it, they will come.

One potential solution for attracting new talent to the province is to advance research programs and build the additional capacity necessary for extending these programs into the province’s rural communities. The province, for instance, recently became an advocate for extending research and development (R&D) programs, incorporating entities such as the Research and Development Corporation (RDC), which “provides leadership, strategic focus and investments in order to strengthen and improve the research system throughout the province.”

Although it is unlikely that NL will become an R&D hub (like, for instance, Singapore), it is uniquely located for specialized studies, for instance, in aquaculture, Arctic relations, and natural resources development.

Furthermore, the provincial government is capable of improving its labour and immigration market. Firstly, tax-rebates afforded to companies that are establishing themselves can create jobs in the province’s rural areas and, secondly, escalating the province’s immigration recruitment strategy can provide capital for NL’s rural areas that have experienced population decline.

Although these initiatives are cost-intense, the current upkeep rate of NL’s rural infrastructure (and other government services) as a percentage of the province’s GDP is growing annually, requiring greater economic output. Bridging this gap is crucial, therefore, not only for sustaining NL’s current demands, but also for reaching the province’s full economic potential.

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

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