Monday, 8 December 2014

NALCOR: THE 'BULLSHIT' STILL THRIVES

There was a time when an appearance by public servants, in front of the media without the presence of their Minister, was a rare sight.  Any such briefing was limited, technical, and forthright.  If ‘spin’ were needed, it remained the Minister’s job to provide cover for the government. Public servants are not politicians.

Since the Williams’ Government hired Nalcor CEO Ed Martin, the Minister of Natural Resources is often nowhere to be seen. Martin has been handed the policy and conducts the implementation role; there is little evidence the Premier or the Minister are knowledgeable enough to be conversant in Nalcor’s entanglements.  Nalcor’s Board of Directors is composed largely of political hacks whose part-time oversight capacity is fundamentally meaningless.

The level of risk to the public purse and to programs and services of Martin’s investment schemes are increasingly evident, as oil prices fall precipitously and overruns on Muskrat are reported. Unfettered by political control, Martin runs a Crown Corporation using public money in the billions; the amounts have no precedent.  The practice seems publicly acceptable because they are thought to be ‘investments’. 

Unbeknownst to the public, however, the investments carry a level of risk which puts them in a ‘speculative’ category.  Such risk tolerance may suit some companies and individuals but they have no place in public policy.  Most certainly, such speculations ought to be shunned when they compete with the monies needed for basic programs and services.

The Government has not so much lost control of Nalcor; it never had any.  Hydro was folded into the larger entity during which time Ed Martin upped the ante on risk via the legacy ventures of Danny Williams.

The CEO has the status of an energy czar possessing the power to demand big cheques (benignly called ‘equity’) from the Department of Finance; having sanctioned these decisions, the Government can do little but comply. The cost of the borrowed money is not reported on Nalcor’s financial statements. Not even the Deputy Minister is in a position of real ‘oversight’.  The authority with which Ed Martin has been empowered far exceeds that of a Cabinet Minister. His capacity for ‘spin’ exceeds the skill of any of them, too.    

In a ‘scrum’ interview last Monday, December 1st Martin responded to a reporter’s question regarding the impact of falling oil prices. It was posted on CBC’s Web Site under the headline "Ed Martin: Falling oil prices not a worry for industry".  It reminded me of how Muskrat Falls sanction moved forward inexorably with the help of an imprudent, even cavalier Premier Dunderdale. 

Martin’s spin constituted, for reporters, what he called “context”. He speaks as one never fearful he will be challenged by them; unconcerned, too, that Premier Paul Davis or the intellectually vacant Minister of Natural Resources will pick up the phone and tell him to cut the crap.

According to its 2013 Annual Report, Nalcor has made “cumulative capital investments since inception totalling $631.3 million” in the oil and gas sector, principally in three offshore wells.

It is instructive to read just a part of the transcript of Martin’s ‘scrum’.  He tells the media:
“…we made our decisions when oil was $50-70/barrel…we’re well within a band, as far as our day to day revenue goes we look at what we call a net back…you put the capital aside, the money has been spent, you look at what it costs you to produce a barrel today and what you are getting for it…our production costs in the $14, $15, $18 per barrel…even at these prices we are still getting US$70-75 which with exchange rates could be up into the $80s; if you are getting $80-85/barrel and its costing you $15  we’re still well within the window of generating significant cash flow for the province and we feel comfortable with where we are right now…” (underline added)

Let’s deconstruct Mr. Martin’s remarks.

Martin says, “…you put the capital aside, the money has been spent”.  In other words, the money that the Government gave Nalcor is ‘sunk’ cost; your money is in…if it has lost value, too bad, it’s spilt milk’.

What does he do next? 

Martin uses the low end of production costs for a barrel of oil. He uses $15.00. He, then, takes the most recent high price for oil or higher ($69.07 on Dec. 8th), converts it to C$ and presto he is back up to $85.00/barrel.  The fiction is obvious except to the unwary.  Yet, Martin is not content; the urge to continue the narrative is irresistible.  He doesn’t let reporters draw a single conclusion. Martin continues: “we’re still well within the window of generating significant cash flow for the province and we feel comfortable with where we are right now…”

The corollary is ‘you have every reason to be comfortable, too’.

Of course, it’s not Ed’s money. He has no effective Board of Directors to warn him or the government.  The shareholders (you) can’t bring up an on-line version of Nalcor’s investments, as they might their own portfolio, to check his performance or see, first hand, how its value has declined these past couple of months. The Economist recently noted that overall, the State Owned Enterprises "...among the world's top 500 firms have lost between 33% and 37% of their value..." Nalcor's size does not put it in this club, but you can be sure it has been busy on a equitable basis with value destruction.

OPEC’s decision not to cut production may cause the cancellation of early stage production projects and reduce oil exploration budgets. The price of oil may eventually recover.  Then, given the rate at which low cost shale oil is entering the U.S market, it may not. Any forecast is extremely speculative right now.

By next year, Nalcor’s investment in oil and gas will be in the $1 billion range. The equity stake in Muskrat Falls continues to grow, too. For how long will the public buy into Ed Martin’s sphere of comfort? Will they be as cavalier as he is about declaring those cheques from Finance, ‘sunk’ cost? Are they ready to extend their exposure to this speculation, risking the social and programs they need? How much capital are they prepared to lose? 

It is time that we had some discussion about these questions; next week’s post will be dedicated to that subject.  

I thought about Ed Martin’s ‘spin’ as he laid out ‘context’ for reporters.  I thought of Kathy Dunderdale, Jerome Kennedy and Tom Marshall, too; lemmings on a precipice propped up by ego and public money. I thought: that's a fellow who knows he won't be challenged.

It would be wrong to lay blame on reporters for the ill-advised course of public policy which Nalcor is pursuing. That is the fault of the Government. But, I have to admire the insight and the tenacity of the The Fifth Estate's Gillian Findlay, as she cross-examined a senior boss over CBC’s handling of the Jian Ghomeshi affair (The Unmaking of Jian Ghomeshi. That was a grilling. 

I thought, given the amounts involved, Ed Martin ought to be forced to constantly defend his utterances rather than be permitted to offer nonsense in support of bad decisions. 'Scrums' or any briefing should not be such a 'walk in the park'.  Were that the case, just possibly, the North Spur, the Energy Access Agreement with Nova Scotia, the problem of oversight and other issues might have been exposed earlier.

Down here, bullshit still thrives.

4 comments:

  1. Ed Martin has been at the helm since 2005. Almost 9 years. In this time, despite investments of 4 times the annual revenue of the company, Nalcor make the same amount today (in real dollars) as what they made in 2005. Around 90 million per year in 2005 dollars. The rate of return on capital employed, or return on equity has consistently decreased. The debt to equity ration (despite some early improvements) is also now back to 2005 levels. Increasingly the money Nalcor makes is from the pockets of Newfoundlanders and Labradorians.

    Yet Nalcor still spew the rhetoric of future divididends... future wealth that could only surpass our wildest dreams. Yet there is no detail, no numbers to back these facts up.

    Heck I would be happy with a rate of return, which considers the interest we are paying on the debt the province is taking on to make these equity investments.

    Meanwhile the NLH website shows our consumption at 1540 MW... and the 120 MW additional generator is not working yet.

    I am afraid the only solution is to make Nalcor a private company, listed on the TSX, with the province holding 50% of the shares. Let the IPO proceeds fund Gull. A publically traded company would keep Nalcor management accountable. Something 3 separate premiers now have been unable to do.

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  2. A working capital asset is NOT a sunk cost; capital assets are valued at the lower of cost or market (usually cost for production assets). You do not put them aside, you amortize them. You must match your expenses to your revenues.

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  3. Insightful post. Much of what you say about NL has been documented in other contexts. Interested readers looking for an excellent holiday book should buy a copy of John Cassidy, _How Markets Fail_.

    Jerry

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  4. I have also been appalled by Martin's cavalier references to how he is poorly managing our money. He seems to forget that he works for the public. He should have been forced to run for office. Such a high ranking civil servant would have to be elected to his position in the US. (There, even District Attorneys must run for office....not that the US model should be endorsed in its entirety. But in Martin's case, his is way to big for his britches.) His political appointment and connections stink more than the mink farms around the bay. I couldn't help notice a strategically planned communications manipulation in late November and in December in the form of 30 to 60-second TV ads with the Chief Operating Officer and other more junior officials clad in plaid and hardhats - all filmed in the field spewing memorized scripts taken right out an episode of the Waltons. Shucks, who would trust these hardworking blue collar know-it-alls? At least an internal acknowledgement that Ed Martin in "over exposed" and risks the same fate as Kathy Dumbderdale. Sadly, I doubt Premier Davis or his staff have the marketing smarts to recognize what it up. You can dress up the sow, but a hog is still a hog...and this one stinks. Where is the independent oversight board we were promised? Lost in the fog of Muskrat foul ups? The Fifth Estate should spend some time here researching the incestuous relationships which result in nauseating appointments like Ed Martin and his honchos. We really do live in a banana republic - one which has seen very competent lawyers and engineers leave for other provinces over the past decades.

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