Guest Post By Cabot Martin
A conversation on Paddy Daley these days might go as follows:
A conversation on Paddy Daley these days might go as follows:
Caller: “We
should get out of Muskrat! Cancel her! Cancel her - right now!“
Paddy: “You
want out?
You want to
cancel?
Do you know
what you are asking for?
How much do you
think that is going to cost?
And where is
the money going to come from?”
Such a
conversation would neatly encompass the existential question facing us.
Yeah “existential”
– big word - as in “if we don’t get this right, we are toast”.
As noted
below, we are not well placed to answer such questions.
But we can
make a start.
First thing
is to size up the hole we are in.
The value of
the amount of Muskrat Falls contracts fully issued and binding to date is far
from clear but it has been put at about $3 billion.
That would
be $3 billion committed to be spent, not $3 billion spent – big difference.
Because when
you cancel a construction project, you don’t ever pay the contractor the full
cost of the project/work to be done as originally conceived.
The courts
will more or less confine the damages that a contractor can properly claim to
out of pocket expenses to date and a reasonable profit foregone.
In fact, the
standard penalty for cancelling construction contracts usually ranges about 15
to 20% of the total contract value.
Guest Post by Cabot Martin
So if $3
billion is the right number, then this would mean that the cost of stopping
Muskrat right now in the spring of 2015 would be in the order of $450 million
to $600 million.
________________________________________________________
Recent Posts by Cabot Martin:
_______________________________________________________________________
So, quite
conveniently, the $750 million allocated to Nalcor in the 2015 /2016 budget
would more than cover the cost of stopping Muskrat Falls – maybe even leave
$150 million or more to be allocated to reduce the presently planned cuts.
The savings
and money available for programs in next year’s budget would obviously be even
bigger.
And similar
large savings would be repeated in construction years 2017 and 2018 and
probably longer - can't forget project schedule slippage and cost overruns.
In one fell
swoop, the Muskrat monkey would not only be off our backs but off the backs of
future generations as well.
Some say it
is too late because it would cost too much to stop – billions are hinted at
without quantification.
But they
don’t have any paper to back it up.
In fact,
apparently neither the Province, nor Nalcor.
Neither
apparently has ever done an internal calculation of the cost of cancelling
Muskrat contracts and of stopping the project – much less commissioned a truly
independent analysis of that critical number.
This sounds
pretty weird but fits with what little we know of Nalcor’s internal
machinations.
But every
now and then, the curtain slips back and a glimpse of the hands on the levers
is seen – such as at the last Nalcor AGM.
Granted
Nalcor AGM’s are mostly self-serving fluff; tough to take; the mob of
consultants, corporate lawyers and various hangers on circling carefully for
another grab is nauseating.
But patience
can be rewarded - like the interesting exchange back on March 26 at the 2015
Nalcor AGM over in the Holiday Inn.
CEO Ed
Martin was attempting to answer a question whether Muskrat’s economic rationale
had been retested using crude prices more realistic than the $135 per barrel
Nalcor still uses to justify Muskrat – like trying $60 to $70 per barrel.
He seemed
unsure of himself as if it were a totally unexpected question.
And then to
the rescue came Ken Marshall from Cable Atlantic, Chairman of the Nalcor Board
of Directors.
Marshall
abruptly cut Ed Martin off to say that Nalcor had never revisited the
cost/benefit of doing Muskrat in light of the drop in oil prices.
And very
aggressively further stated, they had no intention of doing so – case closed.
This was a
very interesting intervention.
Because if
you’ve never considered doing something, like Marshall says, stands to reason
you’ve never calculated the cost of doing so.
So sounds
like Nalcor has never looked into the cost of cancellation.
How about
the Government?
Not likely;
they have been parroting the Nalcor line all along.
But who
knows, maybe the Cabinet’s Oversight Committee has done an analysis of the
costs of cancellation.
If so, and
the Government actually has a report detailing how much it would cost to cancel
Muskrat, let it make it public ASAP.
So that the
public can decide whether continuing with Muskrat is the wiser course of action
or not.
And the
Liberals, who too hastily say too late too - maybe they can ask for such a
study as well.
Not to do
so, would be a dereliction of duty.
