Is Newfoundland and Labrador ready for the full impact of sustained prosperity?

The first barrel of offshore oil produced in 1997 from Hibernia signalled the birth of a new industry that would contribute to the diversification of Newfoundland and Labrador’s economy. Political rhetoric notwithstanding, and after the initial enthusiasm and speculation associated with the discovery of the Hibernia field in 1979 had been tempered, the offshore oil and gas industry was seen as a source of additional employment, business activity, and provincial government revenue.

While the oil and gas industry represented a welcomed expansion of economic opportunities, its potential to radically change the economy, society, and culture of Newfoundland and Labrador only became a reality within the last five years, with the threefold increase in oil prices. With oil prices currently fluctuating around $100 (U.S.) per barrel, coupled with buoyant and expanding mining and energy sectors, the prospects for Newfoundland and Labrador are bright. Canada’s poorest province is about to be transformed from a have-not province, historically characterized by chronic out-migration, to a relatively wealthy economy that by 2009 will neither require equalization nor be able to fill all of the local employment opportunities from within the provincial labour market. That is, almost overnight Newfoundland and Labrador will become a land of opportunity, having to import workers from the rest of Canada and the world.

The first signs of this transformation were the oil-driven budget surpluses of $200 million in 2005-06, $150 million in 2006-07, and $880 million in 2007-08, the first period in which there were adjacent year surpluses in the province’s history. Oil prices haven’t abated and are expected to contribute to enhanced government revenues for some time to come. (Figure 1 on page 44 indicates that the anticipated revenue flowing to the provincial treasury will grow, even excluding the positive impacts of Hebron and other planned energy/resource projects.)

Specifically, using a publicly available price forecast, the provincial treasury is estimated to receive about $1.6 billion per year, or $21.4 billion in total, between 2008 and 2020, peaking at $2.3 billion in 2013-14.
 

With oil prices averaging $100 (U.S.) per barrel in 2008, this increases to $2.3 billion per year and $29.4 billion in total, peaking at $3.3 billion.

In the 2007-08 budget, the peak revenue corresponds to between 50% and 70% of reported non-oil revenues, while the average represents an increment over other non-oil revenues of between 35% and 50%. In other words, the provincial government should have sufficient revenues to address its financial, social, and economic priorities in a planned fashion, should it wish to exercise this option.

The impact of prosperity on Newfoundland and Labrador will be reinforced by the employment boom that is expected within the next five to 10 years, as various planned projects are completed and brought into operation. The projects that are likely to come to fruition in this time period include: Vale Inco’s commercial processing plant; Iron Ore Company of Canada’s expansion of its mining and processing operations; a second oil refinery; the Lower Churchill Project; the White Rose expansion; Hibernia South; the LNG Transshipment and Storage Terminal; and Hebron Ben Nevis.

Figure 2 on page 45 profiles the amount of labour these projects may require within the next 10 years. By the second quarter in 2010, an additional 15,000 direct and indirect jobs could be created within Newfoundland and Labrador, corresponding to a 6.7% increase over current employment levels. Accompanying this employment will be increased opportunities for local businesses. Clearly, Newfoundland and Labrador, at least in the short and medium term, can anticipate the realization of significant economic impacts. The province is becoming a smaller-scale or an earlier version of Alberta, at least in terms of its prosperity.

The tremendous positive impacts associated with this expected prosperity should not be underestimated, but it is equally important to appreciate that there may also be negative consequences. Since the positives and the negatives will, to some degree, occur in any event, it is better to plan than to react.

For example, one should expect the following: labour shortages; wage inflation; an appreciation of housing prices; general inflation; a growing rural-urban divide; and an in-migration of workers. An influx of highly paid workers would normally be associated with other social problems, such as increased drug use and prostitution. There is a risk that an influx of people with no connection to Newfoundland and Labrador’s unique culture could accelerate the erosion of the province’s identity. As well, the growing rural-urban divide will likely increase dissension, as residents not benefiting from the prosperity feel disenfranchised and voice their concerns. Without a plan to share these benefits equitably, efforts will be diverted from optimizing benefits to addressing the concerns about a fair share of the prosperity within the province.

Planning is occurring within the province, but its focus is on the medium to longer term rather than the short term. For instance, the province’s energy plan provides a longer-term vision for the industry, and the immigration strategy may be more effective in the longer term. The interdepartmental large-projects planning committee, chaired by the Minister of Natural Resources, is in its early stages and should facilitate medium- and longer-term adjustments in terms of matching specific labour demands with skills available within the provincial labour force. The diversification strategy is not a short-term fix for rural areas; the strategic partnership between government, labour, and businesses to advance the socio-economic well-being of the province could help with the short term, as labour unions can help attract workers to return to the province. Finally, the support of community–based agencies may help deal with some anticipated social challenges.

Ultimately, there needs to be more of an effort from the research community to address issues related to public policy. A centre of excellence for the study of energy-related issues, housed at Memorial University of Newfoundland in St. John’s and involving all stakeholders, would help Newfoundlanders and Labradorians understand the issues, offer possible solutions to the problems that may arise, and enhance the province’s ability to capitalize on the opportunities created by the developing energy sector.
Although I believe the province is not quite ready for the coming prosperity, many of the issues are being addressed, and it is getting there. Having government, university, and other stakeholders work more effectively together to address the positive and negative aspects of oil and gas development, the people of Newfoundland and Labrador can continue to benefit for years to come without sacrificing their identity or enduring unwanted negative consequences.

Wade Locke is a professor of economics at Memorial University of Newfoundland. He can be reached at wlocke@mun.ca.