To the NLHF Panel:
In this letter, I will confine myself to comments on the financial and legal implications of fracking.
For the financial implications of fracking, we can learn a great deal from the American experience. In America, most wells drilled showed high rates of depletion. A depletion rate of 60 percent in the first year is very common. Typically, many wells are abandoned after 3 or 4 years of productivity. This creates a need to drill more wells, to maintain output and to pay off (primarily interest) on debt incurred so far.
New debt is needed to support new wells. After a few short years of optimism, there still remains a mountain of debt and many abandoned wells to deal with. The recent drop in oil prices has dramatically exposed these inherent weaknesses.
It could be argued that the debt problems are entirely private and external to Newfoundland. However, I would disagree, since corporate debt problems can later appear as problems for the province.
First, one needs to be aware of the “corporate starfish” problem. When a starfish has a damaged limb, it can detach from the limb, grow a new limb, and separate itself from the old dying limb. Corporations can do a similar thing. They can set up “independent” subsidiaries. If a subsidiary suffers heavy losses or creates severe legal problems, the parent company is legally and financially detached from the problems of its subsidiary company. The subsidiary company can be drained of funds and allowed to become defunct, with minimal damage to the parent company. The province is then left holding the bag for any environmental damage caused by fracking. Keep in mind that zombie wells can have substantial leakage problems.
Finally, in the event that the province wishes to limit environmental damage, it may want to place constraints on corporate practices within the fracking industry. International trade treaties, such as NAFTA and other forthcoming trade treaties, severely restrict the government’s options. If corporations feel that their profits have been restricted by government actions they can sue government in offshore trade tribunals. These offshore trade tribunals are very corporate-friendly and can override decisions made by Canadian courts.
No doubt fracking will be presented as having considerable upside and minimal risk for the province. But, when we are talking about risk, do we mean risk for the corporate starfish, or risk for the province and the tax payers?
T. Middleton
In this letter, I will confine myself to comments on the financial and legal implications of fracking.
For the financial implications of fracking, we can learn a great deal from the American experience. In America, most wells drilled showed high rates of depletion. A depletion rate of 60 percent in the first year is very common. Typically, many wells are abandoned after 3 or 4 years of productivity. This creates a need to drill more wells, to maintain output and to pay off (primarily interest) on debt incurred so far.
New debt is needed to support new wells. After a few short years of optimism, there still remains a mountain of debt and many abandoned wells to deal with. The recent drop in oil prices has dramatically exposed these inherent weaknesses.
It could be argued that the debt problems are entirely private and external to Newfoundland. However, I would disagree, since corporate debt problems can later appear as problems for the province.
First, one needs to be aware of the “corporate starfish” problem. When a starfish has a damaged limb, it can detach from the limb, grow a new limb, and separate itself from the old dying limb. Corporations can do a similar thing. They can set up “independent” subsidiaries. If a subsidiary suffers heavy losses or creates severe legal problems, the parent company is legally and financially detached from the problems of its subsidiary company. The subsidiary company can be drained of funds and allowed to become defunct, with minimal damage to the parent company. The province is then left holding the bag for any environmental damage caused by fracking. Keep in mind that zombie wells can have substantial leakage problems.
Finally, in the event that the province wishes to limit environmental damage, it may want to place constraints on corporate practices within the fracking industry. International trade treaties, such as NAFTA and other forthcoming trade treaties, severely restrict the government’s options. If corporations feel that their profits have been restricted by government actions they can sue government in offshore trade tribunals. These offshore trade tribunals are very corporate-friendly and can override decisions made by Canadian courts.
No doubt fracking will be presented as having considerable upside and minimal risk for the province. But, when we are talking about risk, do we mean risk for the corporate starfish, or risk for the province and the tax payers?
T. Middleton