EnergyBC

Economic Impacts

East Coast Studies and West Coast Possibilities

There have been recent economic impact studies of offshore oil and gas development on the East Coast of Canada. By examining the effects of the industry there BC can observe what strategies and policies work best to maximize economic and social benefits for the province and for local communities. However, the scale and type of operations will almost certainly be quite different based on the resource quantities and the methods used to extract them. Therefore, estimates of potential revenues for BC must be considered speculative at best.

A study of the impact on Newfoundland shows that over the period 1999-2002, offshore activities resulted in an increase of 14.7% in gross domestic product (GDP) (average of 1.925 Billion/yr), 6% in personal incomes, and 3.7% increase in employment, including multiplier effects (see below) (Community Resource Services Limited (CRSL) 2003). In total, the industry in Nfld. provided 3,328 direct jobs (annual person years) over the study period and a total of 13,900 jobs with multiplier impacts. The provincial unemployment rate decreased by 2.4%. The increase in employment was less than one-quarter the increase in economic output, indicating the capital-intensive nature of offshore operations.

A recent assessment in Nova Scotia was done for the period 1990-2000 by Gardiner Pinfold Consulting Economists Ltd. (GPCA) (2002). During this period, one offshore project (Cohasset-Panuke) started production in 1992 and closed in 1999 and a second (Sable Island) commenced production in 1999. The average annual contribution of offshore development to GDP was $120 million, equivalent to 0.5% of Nova Scotia’s total GDP. The analysis showed the cyclical nature of the industry, with employment varying between 700 and 11,000 depending on the stage of operations. The value of Sable Island gas production in 2000 was calculated to be $810 million. Most of this revenue was distributed outside of the provincial economy to nonresidents of Nova Scotia, leaving $81 million, or 10 %, of the value accruing to the province. Of this 10% retained in Nova Scotia, 6% accrued as royalty revenue to the province and 4% as employment income distributed to local workers.

A study by Royal Roads University (2004) focused on economic and social impacts for a potential BC offshore development scenario. Estimates were used for the quantity of resource recovered and production methods (non-floating production, storage and off-loading methods) were based on the current operations in Cook Inlet, Alaska due to physical similarities in the geology of the basins. Investments were estimated at $1.3 Billion for exploration and development, with operating costs of $42 million/year. Production would have average annual direct impacts of $422 million/year, with multiplier effects $448 million/year. This is based on 19% of total revenue remaining in the province in the form of wages to BC residents and taxes to the provincial government.

Multiplier Effects ( from SFU, 2004)

Oil and gas development can generate regional economic growth through direct investment in oil and gas extraction and by secondary or “multiplier effects." Potential multiplier effects can be divided into four categories:

The revenue gained from the tasks involved in processing of natural resources prior to export. This are minimal because little processing is required to transform oil and gas products prior to consumption. What processing is required, such as refining oil or transforming natural gas into electricity, often occurs outside the producing region.

Production of equipment such as resource machinery and transportation of infrastructure required to extract oil and gas. These are also minimal because these highly specialized devices are usually produced elsewhere. Estimates for the oil and gas industry in northeast B.C. indicate that there are 0.26 additional jobs generated in this sort of production for each job generated in the oil and gas sector (B.C. Stats 2004a).

The production of consumer goods and services to meet the regional needs of those employed in the oil and gas sector. Estimates for onshore operations in northeast BC indicate that each job in the oil and gas sector generates an additional 0.31 jobs to provide goods and services to workers (B.C. Stats 2004a). When combined with indirect impacts based on the production and transportation of equipment and infrastructure, each job in the oil and gas sector generates an additional 0.57 jobs in the region. This estimate is similar to ones for Alaska, which forecast that each job in offshore oil and gas sector generates an additional 0.42 jobs in the region and 0.02 jobs in the rest of the state (U.S. Department of the Interior (U.S. DOI) 2002a).

The expenditure of rents and profits generated by oil and gas. Rent is the surplus revenue available to the resource owner after deducting all costs of extraction including the cost of capital. Oil and gas rents can finance social and economic infrastructure and trust funds to support economic growth and social welfare (legacy fund). However, several factors constrain the potential fiscal contribution of offshore development, as it generates less rent than conventional oil and gas development because of higher production costs.

Offshore Revenue Concerns (from SFU, 2004) - See also Resource Value

It is important to remember that oil and gas revenue can be highly variable. Oil and gas is a cyclical industry that has throughout the last half century been especially driven by international commodity prices which are influenced by global political events. This is also illustratrated in the fluctuations in oil and gas revenues accruing to the BC government. Fluctuations make fiscal planning difficult because governments can mistakenly assume that temporarily high revenues generated during booms are permanent. When revenues decline during an eventual downturn, governments face long-run fiscal imbalances (Auty 1995). Therefore a proper contingency plan should be in place to offset unpredictable changes in oil and gas prices.

BC must be aware that revenues collected by the provincial government from offshore activities will be offset to some degree by reductions in equalization payments. Former Fisheries Minister John Crosby recently submitted a report for a royal commission stating that Newfoundland has not been (as intended) the primary beneficiary of oil and gas development due in part to lost revenues through equalization clawbacks. His study of the fiscal impacts of offshore development in Newfoundland, for example, forecast that the federal government will receive 75-80% of royalty revenue, in part through reduced equalization payments resulting from Newfoundland’s improved economic performance stimulated by the industry (Crosby, 2003). Crosby has recommended that current accords be re-negotiated to remedy this effect.

SFU (2004) argues that the combination of less rent and different royalty structures means that revenue generated by offshore resources is less than conventional production. Their data shows that royalty rates (as a % of sales revenue) for offshore producing provinces (Nova Scotia - 4%, Newfoundland - 2%) are considerably less than those engaged in conventional production (BC - 28%, Alberta - 15.8%). They are also low in comparison to offshore production overseas (Britain, Norway). These royalty rates can also overstate the net return for governments because they do not factor in subsidies that may be required to compensate for the risk involved in offshore production as was the case in Newfoundland (Marshall 2001).

Some credit from above text to Review of Offshore Oil and Gas Development by Simon Fraser University, 2004 and Royal Roads University: BC Offshore Oil and Gas Socio-Economic Papers, 2004