The Atlantic Provinces Economic Council (APEC) has released an insightful report titled Challenges and Prospects for Newfoundland and Labrador’s Economy. The report provides an independent perspective on the province’s economic challenges and outlines priorities for moving toward economic recovery. The report also clearly indicates the crucial role of the province’s offshore industry.
An economic driver
Offshore oil is the largest contributor to economic prosperity in Newfoundland and Labrador (NL). Oil production and support activities account for 32 per cent of provincial GDP (notably, down from 42 per cent in 2007 but still by far the largest economic contributor). According to the report, the industry directly supports some 3,000 high-paying jobs. Offshore also generates significant spin-off activities in transportation, professional services, construction and manufacturing, housing and hospitality and others: every direct job supports 1.3 indirect jobs.
Royalties from offshore production total $22 billion since 1997, although annual royalties have been $1 billion or less since 2016 – down from an average of $2.2 billion annually between 2008 and 2014.
The industry also supports innovation and skills development. For example, research and development spending totalled $130 million between 2015 and 2018, and spending on education and training totalled $45 million in that same time period. As production from existing offshore developments naturally declines, continued health of the industry will depend on investment in new developments. (Chart courtesy APEC.)
Facing serious challenges
The global oil price collapse in 2020 hit the NL economy hard, then COVID triggered widespread lockdowns and a rapid decline in demand for oil both domestically and around the world. The provincial government estimates the oil price collapse alone removed $470 million in NL royalties in 2020. Offshore operators’ revenues were slashed by about 40 per cent, which caused operators to re-think their planned investments in the offshore.
The last major offshore project to come online was Hebron in 2017.
The report notes the province would suffer substantial economic setbacks in the absence of further offshore investment. APEC’s worst-case projection forecasts NL’s GDP could be 15 per cent lower by 2040. Royalties and employment would also decline. These challenges will have further implications for the province’s economy and social programs as a whole.
The province is forecasting a deficit of $1.8 billion in 2020/2021, up from $1.3 billion the previous year. Net debt will be about $16 billion by the end of 2021, Canada’s largest per-capita debt. If investment in the offshore industry declines, Newfoundland and Labrador will see significant impacts including population decline. (Chart courtesy APEC.)
A forward path
The APEC report outlines various general fiscal measures the province could take (not specific to the offshore industry) but makes one point very clear: the sustainable development of NL’s natural resources is critical to the province’s economy. Although the offshore industry is subject to uncontrollable factors such as global commodity price, governments can take steps to support the industry, especially to enable a competitive investment environment. For example, in 2020 the federal government announced regulatory changes to the assessment process for exploratory drilling.
In addition, NL’s offshore light sweet crude oil has an environmental advantage: in terms of greenhouse gas (GHG) emissions, the industry’s emissions are one-third lower than the global average per barrel. Application of new technologies as the industry continues to evolve can further reduce emissions. This is a significant competitive advantage for investors seeking high performance in environmental, social and governance (ESG) and the province should leverage and promote that advantage.
The report concludes, “Economic development takes time and the results are not guaranteed, but NL has a long history of resilience and innovation.”
