SOCIO-ECONOMIC BENEFITS FROM PETROLEUM INDUSTRY ACTIVITY Socio-Economic Benefits... ·...

SOCIO-ECONOMIC BENEFITS FROM PETROLEUM INDUSTRY ACTIVITY

in Newfoundland and Labrador, 2008-2010

prepared for PETROLEUM RESEARCH NEWFOUNDLAND AND LABRADOR

File No. 121510802 June 5, 2012

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SOCIO-ECONOMIC BENEFITS FROM PETROLEUM INDUSTRY ACTIVITY in Newfoundland and Labrador, 2008-2010

prepared for PETROLEUM RESEARCH NEWFOUNDLAND AND LABRADOR

FINAL REPORT

File No. 121510802 June 5, 2012

June 5, 2012121510802

Socio-economic Benefits from Petroleum Industry Activity in Newfoundland and Labrador

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS ..........................................................iii1.0 Introduction ........................................................................................ 12.0 Context .............................................................................................. 33.0 Economic Benefits 2008 To 2010 ........................................................ 7 3.1 Direct Impacts ............................................................................... 7 3.2 Indirect Impacts ............................................................................ 9 3.3 Total Impacts ................................................................................ 94.0 Infrastructure, Education and Training, and Research and Development ... 13 4.1 Infrastructure ................................................................................. 13 4.2 Education and Training ................................................................. 15 4.3 Research and Development............................................................ 155.0 Company Case Studies ....................................................................... 186.0 Conclusion ......................................................................................... 327.0 References .......................................................................................... 33

APPENDIX AThe Macroeconomic Impacts of the Offshore Oil Industry on the Economy of Newfoundland and Labrador - Update 2011 ..................................... 35

LIST OF FIGURESFigure 2.1 Newfoundland and Labrador Offshore Petroleum Activity and Area Expenditures, 1966-2010 .......................................................................... 5

LIST OF TABLESTable 2.1 Exploration Wells in the Newfoundland and Labrador Offshore: 2008 - 2010 ...................................................................................... 6Table 3.1 Direct Impacts of Offshore Petroleum Industry, Newfoundland and Labrador, 1999-2010 .......................................................... 8Table 3.2 Total Economic Impacts Related to the Offshore Petroleum Industry in Newfoundland and Labrador ............................................................. 10

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ACKNOWLEDGEMENTSThis report was prepared for Petroleum Research Newfoundland and Labrador (Petroleum Research) with financial support from Petroleum Research and the as-sistance of the Newfoundland and Labrador Department of Natural Resources and the Canadian Association of Petroleum Producers (CAPP). The work would have not been possible without the assistance of ExxonMobil, Husky Energy, Suncor Energy, Statoil Canada, Chevron Canada and Nalcor Energy, which compiled most of the data required for the macroeconomic analysis, and the Department of Finance, Gov-ernment of Newfoundland and Labrador, which undertook that analysis.

A wide range of assistance, particularly with the assembly, analysis and interpreta-tion of information, was provided by Shannon O’Dea Dawson (CAPP), Robert Trask (Petroleum Research), Ken Hicks (Newfoundland and Labrador Department of Fi-nance), Dave Finn (Petroleum Research), Heather Mills-Snow (City of St. John’s), Kim Thornhill (Marine Institute), Meaghan Whelan (Memorial University), Robin Walters (College of the North Atlantic), Deirdre Greene (C-CORE) and the representatives of the case study companies. This includes Greg Locke, who provided many of the photographs used in this report.

Finally, this report is made possible by the efforts of the members of the Project Steer-ing Committee, who provided valuable direction and support throughout the comple-tion of the Study.

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1.0 INTRODUCTIONIn November 2003, Petroleum Research Atlantic Canada (PRAC) released a report on the ‘Socio-economic Benefits from Petroleum Industry Activity in Newfoundland and Labrador’ (Community Resource Services Ltd. (CRS), 2003) during the 1999 to 2002 period. The report concluded that the socio-economic effects of the Newfound-land and Labrador offshore petroleum industry have been ‘large, widely distributed, and long-term. It has made, and will continue to make, a very important contribu-tion to the economy and society of Newfoundland and Labrador’ (p.viii). The report also concluded that offshore petroleum activity had helped transform the provincial economy. Updates to this report for 2003 and 2004 (Jacques Whitford 2005) and 2005 to 2007 (Stantec 2009) reinforced these conclusions and determined that production activity, exporting and diversification into other industries have become increasingly important components of the industry, resulting in a more stable pattern of activity and subsequent economic benefits.

This further update has been prepared for Petroleum Research Newfoundland and Labrador (Petroleum Research) by Stantec Consulting Ltd (Stantec), with funding from Petroleum Research and the support of the Newfoundland and Labrador Department of Natural Resources and the Canadian Association of Petroleum Producers (CAPP). It builds on the earlier reports, providing information and analysis for 2008, 2009 and 2010 on:

• Offshore petroleum industry activity and expenditures in Newfoundland and Labrador;

• The resultant direct, indirect and induced economic benefits to the Province; and

• Other benefits-related developments in such areas as infrastructure, education, training and research and development.

This study also summarizes the involvements a range of local companies with the offshore petroleum industry in Newfoundland and Labrador, and the ways in which interactions with the industry have led them variously to develop new goods and ser-vices, hire new personnel, provide them with further training, acquire new facilities and equipment, and improve quality, health, safety and environmental policies and practices. It also considers the way in which the resultant increases in experience and capabilities have led to them winning related work in other jurisdictions, and undertaking work in other industries, both locally and outside the Province.

It should be noted that this study is only concerned with the effects of upstream offshore petroleum activity itself; it does not document the substantial taxes and royalties oil companies paid to the Government of Newfoundland and Labrador. These are very large, for example amounting to approximately $2.4 billion during the 2010-2011 fiscal year. During the same fiscal year, the provincial government also received approximately $120 million in income and consumption taxes from

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labour income generated by the offshore petroleum industry. In addition, the provin-cial government receives corporate income taxes paid on company profits, but this information is confidential and hence not available for this study.

This study also does not review the financial contributions oil companies made to local charities and community groups. These too are substantial; for example, during the 2008-2010 period:

• ExxonMobil supported programs encouraging youth, including Junior Achieve-ment and Techsploration, and environmental stewardship programs such as the East Coast Trail clean-up. It also provided funding to Habitat for Humanity projects and the United Way.

• Husky Energy’s contributions focused on health, education and community proj-ects. This included construction of the Husky Energy Easter Seals House, dona-tions to the Sir William Ford Coaker Foundation in Port Union, Bowring Park Foundation, Red Cross, Bliss Murphy Cancer Centre and Health Care Founda-tion Give from the Heart campaign. Husky also supported the arts through dona-tions to the Garrick Theatre in Bonavista and sponsorship of the Husky Energy Gallery in The Rooms, the provincial museum, archives and art gallery.

• Suncor supported the Newfoundland Symphony Orchestra Big Band Show, Junior Achievement, Suncor Energy Fluvarium and Suncor Energy Buckmasters Circle Boys and Girls Club, and made donations to the Health Care Foundation Give from the Heart campaign.

• Chevron’s community investment and charitable contributions included partner-ships with Stella Burry Community Services and The Rooms, and the develop-ment of a long-term relationship with Choices for Youth as part of the Canada Business Unit’s Adopt an Agency program.

• Statoil’s contributions included donations to Junior Achievement, First Lego League, Shallaway Youth Choir, Newfoundland and Labrador’s Youth in Chorus and the Rock Rugby Club.

• Nalcor Energy’s Community Investment Program focused on education and youth by supporting organizations such as Memorial University of Newfoundland, Junior Achievement and Techsploration and arts and culture through partnerships with the Resource Centre for the Arts, the Newfoundland Symphony Orchestra and the Gros Morne Theatre Festival.

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2.0 CONTEXTOffshore petroleum activity in Newfoundland and Labrador began in 1963, with the first exploration well being drilled in 1966. In the nearly 50 years that have followed this initial exploration, the emergence and continued development of the industry has had a transformational effect on the provincial economy.

Although offshore petroleum activity in Newfoundland and Labrador began in the 1960s, the industry has experienced fluctuating levels of exploration, develop-ment and production activity. In the first case, the pace of exploration has varied in response to varying levels of success, changing oil prices, and the availability of government support (e.g., federal Petroleum Incentive Plan grants in the 1970s). Exploration, including both drilling and seismic activity, peaked in the early-1980s, with minor other peaks in the mid-1990s and late-2000s. This exploration led to the discovery of the Hibernia oilfield in 1979, the Hebron field in 1981, and the Terra Nova and White Rose fields in 1984.

The first development activity did not occur until 1990. Since then, three Grand Banks oilfields, as well as satellite developments such as North Amethyst and Hiber-nia South, have been successfully developed and a fourth is currently under develop-ment.

•Hibernia: The approximately $5.2 billion development of this field, including the construction of a concrete gravity based structure (GBS) and some topsides components at Bull Arm, Trinity Bay, started in 1990. The GBS and topsides were mated in early 1997, and the complete platform was towed to the field in time for first oil production in November 1997.

• Terra Nova: In 1998, Petro-Canada decided to develop the Terra Nova field using a floating production storage and offloading (FPSO) vessel with a South Korean built hull but with much of the topsides fabrication and installation occur-ring at Bull Arm. The FPSO arrived at the field in August 2001 and produced first oil in January 2002. The total Terra Nova pre-production capital expendi-tures were approximately $2.8 billion.

•White Rose: Work developing this field started in 2002. Like Terra Nova, White Rose uses an FPSO with a hull built in South Korea. However, much of the topsides fabrication and installation work occurred in Marystown, Placentia Bay. Some fabrication work, and the testing of some sub-sea components, also took place at Bull Arm. The project had a total capital cost of approximately $2.35 billion and first oil was produced in November 2005.

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•Hebron: During the study period, work began on the environmental assessment of the Hebron Project, and consultations and workshops were held in support of the Development Application Process, and pre-Front End Engineering and Design (FEED) and FEED activities took place. Construction on the Hebron GBS and topsides is scheduled to begin in 2013.

The scale of industry expenditures during the study period has been impressive. In 2008, expenditures totaled approximately $1.7 billion, a 21 percent increase over the previous year. During the study period, expenditures peaked at approxi-mately $2.2 billion in 2009, an increase of 28 percent over the previous year. This was largely driven by a corresponding peak in development expenditures, which reached approximately $450 million in 2009, an increase of approximately 78 per-cent from 2008. This can be largely attributed to the development of Husky’s North Amethyst development, the Hibernia South expansion, and the initiation of develop-ment activity for the Hebron Project. In 2010, development expenditures declined by approximately 30 percent to approximately $315 million. Although total expen-ditures also declined, at approximately $1.9 billion they were still higher than at the beginning of the study period (Figure 2.1).

The North Amethyst development provides an example of how a satellite develop-ment can result in substantial benefits to the local industry. In addition to exceeding original estimates of 1.6 million person-hours taking place in Newfoundland and Labrador, all subsea engineering took place within the Province. It is also notewor-thy that, with less than four years between discovery and development, the North Amethyst project saw a drastic reduction from previous development timelines in the Province.

During the study period, Newfoundland and Labrador also assumed an equity posi-tion in both offshore and onshore exploration and development projects. In 2009, the Province, represented by Nalcor, finalized the purchase of a five percent work-ing interest in the White Rose Growth Project, which includes the North Amethyst, West White Rose and South White Rose Extension fields. In 2010, Nalcor acquired a 10 percent working interest in the Hibernia Southern Extension project. This in-cludes two new licenses, as well as an area of the main field covered by a separate license.

In 2008 and 2009, the production from the Newfoundland and Labrador offshore fell, largely as a result of natural declines at the existing developments. In 2008, total petroleum production was 125.2 million barrels, a decrease of 6.9 percent over the previous year. In 2009 total production was 97.7 million barrels, a further decline of 22 percent. However, in 2010, satellite projects helped offset this decline with both Husky’s North Amethyst field and Hibernia’s AA blocks producing first oil. As a result, 2010 production was 100.7 million barrels, an increase of 3.1 percent over the previous year.

Continued delineation during the 2008-2010 period resulted in an increase in the official reserve estimates for Hibernia and Terra Nova. In 2009, the C-NLOPB revised reserves at the Terra Nova field to 419 million barrels from 354 million

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Figure 2.1 Newfoundland and Labrador Offshore Petroleum Activity and Area Expenditures, 1966-2010

Source: C-NLOPB

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barrels. In 2010, Hibernia’s reserves were also revised to 1,395 million barrels from 1,244 million barrels. The estimated reserves for White Rose remained at 305 million barrels; however, during the study period, reserves for North Amethyst (68 million barrels) were included in C-NLOPB estimates (C-NLOPB 2008, 2009, 2010).

Environmental work continued to be an important element in the development of the offshore. Strategic Environmental Assessments (SEA) for the Labrador Shelf (2008) and Southern Newfoundland (2010) were completed on behalf of the C-NLOPB. An SEA considers the larger ecological setting of an area and is used to inform strate-gic decisions, such as the issuance of exploration licenses in previously un-assessed offshore areas. In addition to these SEAs, operators continued routine environmental effects monitoring programs at producing fields (C-NLOPB 2008, 2009, 2010).

International companies active in the Newfoundland and Labrador offshore petro-leum industry continued to expand their presence locally during the study period. For example, in 2008 Technip expanded its local office while both Rolls Royce and ABB opened offices in St. John’s in 2009.

During the study period, the federal government also expanded its presence in the Province. In June 2008, the Atlantic Canada Energy Office (ACE) was established. As a partnership between the Atlantic Canada Opportunities Agency (ACOA) and Natural Resources Canada (NRCAN), ACE’s mandate includes both the tradi-tional petroleum sector and the clean and renewable energy sector, and integrates NRCAN’s mandate for energy resources and policy with ACOA’s mandate for economic development. ACE has its main office in St. John’s and maintains a small regional staff.

Diversity has become an important issue for both operators and contractors who con-tinue to actively encourage the employment of women, Aboriginal people, persons with disabilities and visible minorities, and business access by companies they own or operate (see, for example, the Hungry Heart case study (Section 5.0)). During the Study Period, Husky Energy continued the successful implementation of the

Table 2.1 Exploration Wells in the Newfoundland and Labrador Offshore: 2008 - 2010WELL NAME LOCATION SPUD DATE* WELL TERMINATION DATE

Glori E-67 West Coast 14-Jan-2008 15-Jul-2008

Shoal Point 2K-39 West Coast 04-Mar-2008 26-Jun-2008

Shoal Point 2K-39 Z West Coast 27-Jun-2008 30-Jul-2008

Mizzen O-16 Flemish Pass 21-Dec-2008 20-Mar-2009

Ballicatters M-96 Jeanne D’arc Basin 24-Jul-2009 23-Oct-2009

East Wolverine G-37 Laurentian Basin 24-Nov-2009 23-Apr-2010

Glenwood H-69 Jeanne D’arc Basin 25-Jan-2010 19-Mar-2010

Lona O-55 Orphan Basin 10-May-2010 22-Aug-2010

* start of drilling

Source: NLDF 2009

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White Rose Diversity Plan, and the Hebron Project proceeded with development of its Diversity Plan, actively working with its major contractors, and groups such as the Women in Resource Development Corporation (WRDC) and the Independent Living Resource Centre to incorporate diversity into the Project as early as possible. Other industries throughout the Province continue to look to the oil and gas industry as a model for building diversity into their operations.

3.0 ECONOMIC BENEFITS, 2008 TO 2010This section of the report provides a more detailed picture of the economic effects of offshore petroleum activity on Newfoundland and Labrador, focusing on the impacts in 2008, 2009 and 2010. These findings are presented in the context of a revised analysis of the impacts discussed in the earlier reports.

The analysis was prepared by the Economic Research and Analysis Division, De-partment of Finance, Government of Newfoundland and Labrador. It examines the direct, indirect, and induced effects of offshore petroleum industry activity between 2002 and 2010 (the reference period). The Department of Finance report is pro-vided in its entirety in Appendix A.

3.1 DIRECT IMPACTS

This analysis of the total economic impacts of offshore petroleum activity on New-foundland and Labrador is based on its direct impacts during the years 2002 to 2010 (Table 3.1), established using information from ExxonMobil, Suncor, Husky Energy, Chevron, the C-NLOPB and Statistics Canada.

These data can be divided into costs related to production, which shows a general pattern of increase in its overall contribution to the provincial economy, and those related to exploration and development activity, which have been more susceptible to fluctuations over time and are influenced by such factors as drilling and labour costs. Although production had previously showed a pattern of relatively consistent increases, the period of 2008-2010 was characterized by general decline. As was noted above, in 2008 total production was 125.2 million barrels, a decrease of 6.9 percent over the previous year. In 2009, total production was 97.7 million barrels, a decline of 22 percent. This was the result of natural production declines at the three producing fields. In 2010, production increased by 3.1 percent as a result of first oil at both North Amethyst and Hibernia’s AA Block.

Wages, salaries, and benefits associated with development activity greatly increased from 2007 to 2008, rising from approximately $8 million to approximately $29 mil-lion. After this increase, costs remained relatively stable over the study period, albeit with a decline from $29 million in 2009 to approximately $20 million in 2010. Wages, salaries, and benefits associated with production increased steadily over

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the study period, rising from $207 million in 2007 to $259 million in 2008. This increase peaked in 2010 at $291 million.

As discussed above, the level of exploration in Newfoundland and Labrador has varied since it began in the 1960s, peaking in the early 1980s. The direct economic impact of exploration activity continued to fluctuate during the study period, although factors such as increased rig costs have resulted in higher costs overall. During the study period, exploration costs peaked at $384 million in 2009, declining slightly to $334 million in 2010.

The development of North Amethyst and Hibernia South, both satellite developments of existing offshore installations, resulted in a substantial increase in costs associated with development, which rose by approximately 365 percent to $253 million in 2008 and increased by an additional 77.9 percent in 2009. Following the comple-tion of these satellite developments, costs associated with development declined by approximately 30 percent to $315.5 million in 2010. Despite this decline, costs were still 480 percent higher than in 2007, largely due to initiation of development work for Hebron which provided continuity for development phase expenditures.

Over the course of the study period, development activity continued to be less important relative to the more stable effects of production in terms of contribution to overall expenditures, amounting to only 28 percent of total capital expenditures for the period. The contribution of development to total expenditures was 26 percent in 2008 and peaked in 2009 at 31 percent before declining to 27 percent in 2010.

Table 3 1 Direct Impacts of Offshore Petroleum Industry, Newfoundland and Labrador, 1999-2010

2002 2003 2004 2005 2006 2007 2008 2009 2010

Capital Costs ($ Millions)

Exploration 55.9 101.2 24.2 119.5 241.4 122.3 92.1 384.3 333.9

Development 492.8 551.0 616.8 436.4 2.3 54.4 252.9 449.9 315.5

Production 515.9 474.2 457.4 507.4 723.6 604.3 633.0 610.1 530.2

Total 1,064.6 1,126.4 1,098.4 1,063.3 967.3 781.0 978.0 1,444.3 1,179.6

Employment (Person-Years)

Development 408 1,508 2,192 962 15 100 326 328 204

Production 1,728 1,761 1,680 2,396 2,974 2,552 2,653 2,901 3,021

Total 2,136 3,269 3,872 3,358 2,939 2,652 2,979 3,229 3,225

Barrels of Oil Production (Millions)

104.3 122.9 114.8 111.3 110.8 134.5 125.2 97.7 100.7

Operating Costs ($ Millions)

233.8 240.9 233.2 282.3 621 602.7 701.4 707.1 686.9

Wages/Salaries & Employee Benefits ($ Millions)

Development 33.3 130.8 198.9 77.8 1.2 8.1 28.7 29.2 19.6

Production 141.2 152.7 152.4 193.7 225.3 207.4 233.5 258.6 291.1

Total Labour Income 174.5 283.5 351.3 271.4 226.4 215.6 262.2 287.8 310.8

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At its peak in 2000, development was responsible for 74 percent of all capital costs. At its lowest point in 2006 following the completion of White Rose, development expenditures contributed to less than one percent of total costs.

The size of industry activity in terms of total expenditures (i.e., capital plus operat-ing costs) peaked at $2.2 billion in 2009, an increase of almost $0.5 billion over 2008. In 2010, costs declined slightly to $1.9 billion. In 2007, capital costs fell be-low $1 billion for the first time since 2001 and remained below that mark in 2008. Capital costs increased during the study period, peaked at $1.4 billion in 2009, and declined slightly to $1.2 billion in 2010.

3.2 INDIRECT IMPACTS

A substantial portion of the local benefits from the offshore petroleum industry activ-ity accrues to companies providing goods and services to oil companies. Supplier impacts, or indirect impacts, are dependent on non-wage operating spending and capital spending by oil companies. The provincial Department of Finance’s New-foundland and Labrador Input-Output Model (NALIOM) was used to obtain indirect employment, gross domestic product (GDP) and labour income impacts. The main types of businesses providing services to the offshore petroleum industry included services incidental to mining and oil and gas; miscellaneous business services; air transport; water transport; wholesaling; storage; and architectural, scientific, and engineering services.

After these indirect linkages have been accounted for, there were average total annual direct and indirect nominal GDP impacts of approximately $7.6 billion, and annual direct and indirect employment impacts that averaged approximately 9,200 person-years. In the most recent year examined, 2010, the direct and indirect nomi-nal GDP impacts were higher than average ($8.5 billion) because oil production levels were high and oil prices were also very high.

3.3 TOTAL IMPACTS

Data on direct and indirect economic impacts are key inputs to the simulation of the overall effects of the offshore petroleum industry on the economy of the Prov-ince, using the Department of Finance’s Newfoundland and Labrador Econometric Model (NALEM). The model provides measures of the total (i.e., direct, indirect and induced) effect of the industry on a wide range of indicators, including GDP, employ-ment, personal income, consumer spending and population change (Table 3.2).

During the study period, GDP impacts (i.e., the business and labour income earned within the geographic boundaries of the Province) peaked in 2008 and then decreased sharply from 28.3 percent of the total GDP (Real GDP chained) to 26.4 percent in 2009 and 25.1 in 2010. This reflects both the natural production decline and lower oil prices in 2008 and 2009 as a result of the global economic downturn. Aside from these impacts, the overall pattern of change in total impacts reflects the increased development activity and relatively stable production costs described in Section 3.2.

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Table 3.2 Total Economic Impacts Related to the Offshore Petroleum Industry in Newfoundland and Labrador

2002 2003 2004 2005 2006 2007 2008 2009 2010 Average

GDP ($ Millions) 4,144 5,138 5,833 7,267 8,141 10,261 12,875 7,668 8762 7,788

Share of Total (%) 27.7 31.1 32.8 35.8 35.2 38.6 44.3 33.3 33.3 34.8

Real GDP Chained ($ Millions) 4,088 4,710 4,439 4,537 4,641 5,356 5,117 4,345 4,365 4,622

Share of Total (%) 27.3 29.6 28.2 28.1 27.9 29.4 28.3 26.4 25.1 27.8

Personal Income ($ Millions) 663 957 979 930 935 866 986 1152 1130 955

Share of Total (%) 5.6 7.7 7.6 7.0 6.7 5.9 6.3 6.9 6.5 6.7

Labour Income ($ Millions) 497 718 734 698 701 650 739 864 848 717

Share of Total (%) 6.9 9.4 9.2 8.4 8.1 7.0 7.5 8.0 7.5 8.0

Other Income ($ Millions) 166 239 245 233 234 217 246 288 283 239

Share of Total (%) 3.5 5.0 5.0 4.7 4.5 3.9 4.3 4.8 4.6 4.5

Disposable Income ($ Millions) 522 752 766 726 738 681 779 923 911 755

Share of Total (%) 5.6 7.7 7.6 7.0 6.7 5.9 6.3 6.9 6.5 6.7

Retail Sales ($ Millions) 292 421 429 407 413 381 436 517 510 423

Share of Total (%) 5.4 7.3 7.5 7.0 6.9 5.8 6.2 7.3 6.9 6.7

Housing Starts ($ Millions) 104 150 153 145 148 136 156 185 182 151

Share of Total (%) 4.3 5.6 5.3 5.8 6.6 5.1 4.8 6.0 5.1 5.4

Employment (‘000s) 11.0 14.5 13.6 13.4 13.5 12.0 12.9 14.0 12.8 13.1

Share of Total (%) 5.3 6.9 6.4 6.3 6.3 5.6 5.9 6.6 5.8 6.1

Labour Force (‘000s) 7.5 10.8 9.7 10.0 10.6 9.1 9.8 10.9 9.8 9.8

Share of Total (%) 3.0 4.3 3.8 4.0 4.2 3.6 3.9 4.3 3.8 3.9

Unemployment Rate(%) -2.0 -2.3 -2.3 -2.1 -1.9 -1.7 -1.8 -2.0 -1.8 -2.0

Population (‘000s) 12.6 18.0 16.1 16.6 17.7 15.1 16.4 18.2 16.4 16.3

Share of Total (%) 2.4 3.5 3.1 3.2 3.5 3.0 3.2 3.6 3.2 3.2

The macroeconomic impacts that are presented below represent a substantial impact on the provincial economy. Nominal GDP was, on average, roughly $7.8 billion per year higher over the 2002 to 2010 period and $8.8 higher billion in 2010 as a result of offshore oil activity (n.b. nominal GDP not included in Table 3.2). The offshore petroleum industry and its indirect and induced impacts gener-ated 34.8 percent of the Province’s nominal GDP between 2002 and 2010. In 2010 the share was 33.3 percent.

Much of the business income earned in Newfoundland and Labrador’s offshore petroleum industry accrues to non-resident companies. Therefore, business in-come directly related to the industry generally would not accrue to residents and therefore is not reflected in the personal income impact. Personal income impacts, primarily wages and salaries, reflect only income received by provincial residents. Consequently, the personal income impacts are smaller than the GDP impacts.

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Personal income from the offshore petroleum industry was approximately $950 million per year higher during the reference period and represented approximately 6.5 percent of total personal income in Newfoundland and Labrador. Personal income levels from the industry declined between 2004 and 2007, partially due to completion of construction activity supporting the White Rose development. Personal income from the industry has increased in recent years due to strong wage growth and increased activity related to the development of North Amethyst and Hibernia South. In 2010, personal income attributed to the offshore petroleum industry was $1.1 billion, or 6.5 percent of total income.

Personal income impacts mainly reflect the boost to labour income resulting from the offshore petroleum industry’s high-wage jobs, as well as labour income from spinoff employment (indirect and induced). Annual disposable income increased by approximately 22 percent between the 2005-2007 and 2008-2010 study periods, from an average of approximately $715 million during 2005-2007 to an average of approximately $871 million during 2008-2010. Consumer spending in the form of retail sales also increased, by approximately 22 percent between the 2005-2007 and 2008-2010 study periods.

The estimated annual employment impact averaged approximately 13,000 person-years over the 2002-2010 reference period, representing 6.1 percent of total provincial employment. On average, the unemployment rate was 2.0 percentage points lower as a result. The decline in unemployment would have been greater except that increased employment, higher average wages and higher population encouraged more labour force participation. The rise in the labour force was ap-proximately two-thirds as large as the gain in employment.

Excepting GDP impacts which are heavily influenced by production, the economic indicators in Table 3.2 all peaked in 2009 which corresponds to a peak in devel-opment expenditures (Figure 2.1). Additionally, although the indicators showed a slight decline in 2010, they were consistently higher than during the previous study period (2005 2007). An overview of each of the economic indicators is below:

• Personal income increased from $866 million in 2007 to $986 million in 2008. Following a peak of approximately $1.2 billion in 2009, personal income de-clined slightly to $1.1 billion in 2010.

• In 2008, employment resulting from industry activity increased to 12,900 person years from 12,000 in 2007. After a peak of 14,000 in 2009, employment declined to 12,800 person years in 2010. This represented an increase in the industry’s contribution to provincial employment from 5.9 percent in 2008 to a peak contribution of 6.6 percent in 2009. Also, the contribution of the industry to provincial employment resulted in the provincial unemployment rate being an average of 1.9 percent lower over the study period.

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• Labour income increased by 13.7 percent from $650 million to $739 million between 2007 and 2008, and peaked at $864 million in 2009. It subsequently decreased to $848 million in 2010. At its peak, this represented eight percent of labour income in the Province.

• Housing starts attributed to industry activity increased by 18.6 percent, from 156 in 2008 to 185 in 2009, when it represented six percent of the provincial total. Although declining slightly to 182, housing starts remained 16.6 percent higher in 2010 than at the beginning of the study period.

Despite the uncertainty surrounding the calculation of population impacts, the analysis does show that offshore petroleum industry is making a substantial contribu-tion to the Newfoundland and Labrador economy, particularly in relation to GDP and employment. The contribution to the GDP from oil production will likely decline in the short-term as the most productive reserves belonging to the current producers have been depleted and overall production levels are expected to fall in the medium term. However, other production related benefits such as employment and personal income are not expected to be affected by the production declines. In addition, development impacts are expected to increase as construction activity ramps up as activities related to extensions to White Rose and Hibernia South and the develop-ment of Hebron occurs in the coming years.

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4.0 INFRASTRUCTURE, EDUCATION AND TRAINING, AND RESEARCH AND DEVELOPMENT

4.1 INFRASTRUCTURE

The ongoing development of the Newfoundland and Labrador offshore petroleum industry is supported by, and has made a substantial contribution to, infrastructure development in Newfoundland and Labrador. This contribution has been docu-mented in the prior reports in this series (see Section 1.0). Over the long term, the availability of infrastructure reduces the costs of development, increases the likeli-hood of additional petroleum industry investment in Atlantic Canada, increases the Province’s ability to be involved in the industry’s construction, fabrication and opera-tions activities, and ultimately increases Newfoundland and Labrador’s participation in the industry. Some of this infrastructure has also contributed to the diversification of Newfoundland and Labrador’s business community. For example, many New-foundland and Labrador companies have successfully leveraged harsh environment engineering expertise developed in provincial facilities to gain additional experience in Arctic environments.

The 2008-2010 period saw continued development and growth in supporting infra-structure for the Newfoundland and Labrador offshore petroleum industry. This was in support of increased production, exploration, and drilling activity, and is evident in activity among local companies, as well as the supporting government, institu-tional and transportation infrastructure.

For example, the Marine Institute of Memorial University opened a new marine base in Holyrood in 2010. The Holyrood Marine Base will be a focal point for the Marine Institute and for a variety of oil and gas related research and education activities including:

• Ocean technology;• Fisheries;• Marine environment;• Diving;• Offshore safety and survival;• Oil spill response;• Oceanography; and,• Marine biology.

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Also in 2010, the Marine Institute purchased new ocean-mapping equipment in support of its ocean technology programs. The equipment, including multi-beam sonar, a sub-bottom profile, will support programs such as the new joint Diploma of Technology/Bachelor of Technology in Ocean Mapping. This will also enable the Marine Institute to conduct applied research in ocean mapping. Applications include determining pipeline routes for offshore oil production and identifying safer routes for vessel traffic. The Marine Institute also purchased a wave piercing catamaran, the MV Atlanticat, which provides a marine platform to deploy research equipment. This vessel was funded through a $1.5 million investment from the provincial govern-ment and Memorial University, and has increased research and training capacity for the Marine Institute.

In 2010, Memorial University opened an Autonomous Ocean Systems Laboratory to advance harsh environment research capacity. The laboratory provides uniquely designed space to researchers, including undergraduate and graduate students, which will be a catalyst for research on autonomous ocean systems in ice-covered and otherwise harsh environments. The laboratory was established with support from the Research and Development Corporation of Newfoundland and Labrador (RDC) Canada Research Chair program and the Canada Foundation for Innovation. In February 2010, a partnership was announced between Chevron Canada, Memorial University and the Research and Development Corporation (RDC) that resulted in a new Process Engineering Design and Research Laboratory at the Memorial Univer-sity St. John’s campus.

The College of the North Atlantic (CNA) continued to upgrade many of its industrial trades shops and engineering technology laboratories, including a $2 million refur-bishment of the welding shop at the Prince Philip Drive campus.

There was also continued private-sector investment in infrastructure. For example, Pennecon Energy Marine Base invested more than $3.5 million in infrastructure de-velopment at its Bay Bulls facility. In addition to the installation of a concrete caisson that expanded its dock space from 60 m to 90 m, Pennecon increased warehouse space by approximately 1,021 m2 (11,000 ft2) and expanded its secure laydown area.

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4.2 EDUCATION AND TRAINING

The study period also saw a range of further investments in education and training, beyond the infrastructure described above, For example, CNA increased the intake into the Process Operator Engineering Technology Program through its oil and gas funding. This three-year program has an annual capacity of 20 students and previ-ously had an alternate year intake. In 2010, a new three-year co-op program in Chemical Process Engineering Technology was introduced with an annual capacity of 24 students.

Undergraduate enrollment in the Faculty of Engineering and Applied Science at Memorial University was relatively steady during the study period with 1,039 stu-dents in 2008, 1,128 in 2009 and 1,203 in 2010. During this period, the Faculty awarded 480 undergraduate engineering degrees. Approximately 400 Memorial University co-op students were placed with oil and gas companies in each year. Up to 90 percent of these positions went to engineering students, while the remainder went to business students (Anil Raheja, pers comm).

During the study period, C-CORE matched funding from the provincial government’s Department of Industry, Trade and Rural Development to provide work-terms and internships to new graduates pursuing careers in geotechnical engineering. In total, C-CORE employed 33 work-term and other undergraduate students and the organi-zation’s total 2008-2010 investment in students was $323,429.

C CORE’s contribution to develop the Province’s base of expertise in this field also extended to a partnership with Memorial University to cost-share a Chair in Geotech-nical Engineering, allowing Memorial University to attract a senior Professor to the Province to develop new academic programs within the Faculty of Engineering.

4.3 RESEARCH AND DEVELOPMENT

During the 2008-2010 period, research and development (R&D) was an area of high activity in the provincial offshore petroleum industry, with industry, educational institutions, and research organizations providing support for the advancement of industry locally, as well as providing a mechanism for the transfer of local expertise into international markets.

In October 2009, Memorial University announced a partnership with the American Bureau of Shipping to create a new Harsh Environment Technology Centre. Respond-ing to a demand for ice class guidance for offshore structures in harsh environments, the new centre is designed to support the development of technologies for ships and offshore structures operating in harsh environments, particularly the Arctic. Applied research will be conducted to study vessels and units operating in ice covered wa-ters, low temperature environments, and severe wave and wind climates.

The Institute for Ocean Technology (IOT) was involved in a number of projects either directly related to, or with applications in, the offshore petroleum industry. For example, working with Memorial University and other National Research Council

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(NRC) institutes, the IOT has taken the lead in the Escape, Evacuation and Rescue Project. This project has tested different lifeboat hull designs in pack ice and wave conditions as well as conducting tests of marine safety systems in extreme environ-ments to update safety equipment guidelines, while transferring research data and new technologies to the private sector. With funding from Transport Canada and Natural Resource Canada’s Program on Energy Research and Development, the IOT has also been involved in a survival research project concerning the effects of wind and waves on the thermal regulation of people in immersion suits. The results of this study will be incorporated into any future review of regulations for marine safety and survival equipment.

Petroleum Research has continued to fund projects with application in both the Newfoundland and Labrador offshore and in Arctic areas such as Greenland, where Newfoundland and Labrador companies have begun to operate in support of exploration activities. During the study period, Petroleum Research awarded approxi-mately $1.8 million in funding to companies and institutions undertaking research with application in the offshore petroleum industry. With PRAC funding, Memorial University’s Ocean Engineering Research Centre (OERC) and the IOT engaged in a project that studied ice composition, structural design, and iceberg impact model-ling. The aim was to examine ways of minimizing the risks of damage caused by icebergs. The study also incorporated risk analysis and probability into the larger challenge of operating offshore structures in iceberg-busy waters.

Petroleum Research has also funded studies in reservoir characterization and health, safety and environment. The latter includes funding provided to Virtual Marine Tech-nologies (VMT), in partnership with OERC, and Marine Institute’s Centre for Marine Simulation (MI-CMS), to develop a virtual trainer and curriculum to expand upon the existing live boat training program.

Over the 2008-2010 period, the Research and Development Corporation (RDC) of Newfoundland and Labrador funded several projects through the Industrial Research and Innovation Fund (IRIF). In 2008 a five-year, $3.7 million, Advanced Explora-tion Drilling Technology project was initiated by a partnership that includes ACOA, RDC, Husky Energy and Suncor. This applied research project is undertaking an experimental and numerical investigation of vibration-assisted rotary drilling leading to the development of a prototype drilling tool. In 2010, RDC invested more than $400,000 in research into the use of underwater vehicles in extreme environments, such as the Arctic. This funding was provided through the Leverage R&D component of the IRIF which enables researchers to leverage additional funding from other sources such as NSERC. Additional funding for research in the design, navigation and control of Autonomous Ocean Systems was provided through the Ignite R&D portion of the IRIF.

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A $500,000 investment from Wood Group and an additional $500,000 in sup-port from RDC through the IRIF, allowed Memorial University to establish the Wood Group Chair in Arctic and Cold Region Engineering in 2009. The objective of the chair is the development of technology for application in Arctic and cold region oil and gas development, specifically pipeline design, construction and operations in northern regions.

The year 2010 saw the announcement of a number of other major R&D initiatives:

• Chevron Canada announced that the Chevron Corporation had selected Memo-rial University to join its University Partnership Program (UPP). Memorial is the first university in Canada selected for the program, which includes approximate-ly 100 universities and colleges worldwide.

• Chevron and RDC established the Chevron Chair in Petroleum Engineering at Memorial University, with a $500,000 investment from Chevron and an ad-ditional $500,000 in support from RDC through the IRIF. The chair will estab-lish, promote and focus research and teaching in petroleum engineering with the objective of increasing petroleum engineering capability within the current undergraduate programs.

• Suncor contributed $2 million to the expansion of the SJ Carew building, home of the Memorial University Faculty of Engineering and Applied Science and the Suncor Energy Offshore Innovation Center.

• The Terra Nova and Hibernia projects committed a total of $12.5 million over 5 years to establish the C-CORE Center for Arctic Resource Development. This centre of technological excellence will support Arctic oil and gas development through world-class, industry-driven, forward-thinking R&D, supporting the safe, responsible, cost-effective and sustainable hydrocarbon development in Arctic and sub-Arctic regions.

Additional R&D work undertaken by such private-sector and non-profit companies as Oceanic, C-CORE, PAL and VMT is described in the following section of this report.

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5.0 COMPANY CASE STUDIESThe success of the offshore petroleum industry in Newfoundland and Labrador is both a result of, and exemplified by, the success of local companies. There is now a large provincial supply and service sector, the interests of which are represented by the Newfoundland and Labrador Oil and Gas Industry Association (NOIA), which as of 2010 had 523 member companies, compared to 485 in 2008 and 496 in 2009 (D. Rideout, pers comm), an average annual growth rate of approximately four percent.

This section of the study summarizes the involvements a range of such companies with the offshore petroleum industry in Newfoundland and Labrador, and the ways in which interactions with the industry have led them variously to develop new goods and services, hire new personnel, provide them with further training, acquire new facilities and equipment, and improve quality, health, safety and environmental policies and practices. It also considers the way in which the resultant increases in experience and capabilities have led to them winning petroleum industry work in other jurisdictions, and undertaking work in other industries, both locally and outside the Province.

The case study companies have been selected to reflect the diversity of activity in and around the oil industry. This includes companies of different sizes, engaged in construction, manufacturing and the provision of technical and professional services, located in St. John’s and elsewhere in Newfoundland and Labrador. Some of them are engaged in cutting edge engineering and R&D activity, while others provide important but more mundane services in such areas as real estate, hotel accommo-dations, photography and office catering.

One of the most striking examples of a Newfoundland and Labrador company that has flourished because of the oil industry is the Cahill Group. It grew out of a small electrical company, focused on residential work, founded in 1953. In 1991, it was successful in bidding the electrical work on the initial Bull Arm Hibernia construction site work camp. Building on that opportunity, it went on to work on the construction site swimming pool and gym, the Hibernia topsides, and the final Hibernia hook-up, and it is still undertaking offshore work on the Hibernia platform. It has expanded into a range of electrical, mechanical installation, industrial mechanical and pipe fabrication work, including the construction of a White Rose FPSO topsides module, additional Terra Nova FPSO accommodations, and subsea manifolds for the North Amethyst Tie-back Satellite development. The Cahill Group now provides a wide range of electrical and instrumentation, mechanical, piping and instrumentation services.

Based on its success in Newfoundland and Labrador, 2005 saw the company make a strategic decision to expand to Alberta. It has successfully bid sophisticated work on three oil sands projects for Canadian Natural Resources Limited, benefitting from the rigorous quality and other systems it had had put in place in Newfoundland and

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Labrador, and allowing the company to build its capacity, resources and balance sheet and help deal with cyclical variations in demand in both provinces. The com-pany has also undertaken a range of oil industry work in the Maritimes, including on the Sable Gas compression platform and Tier 2, the Imperial Oil refinery in Dart-mouth, Nova Scotia, and the Irving Oil refinery in Saint John, New Brunswick.

The Cahill Group’s locally-developed capabilities and resources have also allowed it to expand into non-oil industry activity, including work on the Voisey’s Bay and Long Harbour projects (through alliances with such companies as ABB, P. Kiewit and Black Macdonald), the Newfoundland Refinery and Iron Ore Company of Canada’s (IOC) iron ore mine in western Labrador. Strategic partnerships have also assisted in capturing further oil industry work, for example with Aker and SNC-Lavalin in undertaking Husky Energy maintenance and modifications work. Outside of Newfoundland and Labrador, the Cahill Group has assisted in the construction of waste and water treatment plants across Atlantic Canada, and it is responsible for the electrical and instrumentation, mechanical and piping work on the Wuskwatim Generation Project, a joint venture between Manitoba Hydro and the Cree Nation at Taskingigup Falls. The latter work, together with the establishment of the Iskueteu joint venture in Labrador, has been designed not least to position the company for potential work on other hydro projects.

In a recent development, the Cahill Group has moved its Corporate Office to the re-developed St. Bride’s College, now re-named as The Tower Corporate Campus at Waterford Valley. The company has come full circle with the purchase of the prop-erty; in the late 1960s, GJ Cahill was selected as the sole electrical contractor for the installation of the electrical systems for the construction of St. Bride’s College, owned and operated by The Sisters of Mercy, one of the largest institutional projects of the time. The 12,000 m2 Tower Corporate Campus is now the home to many of the companies involved in the Hebron project.

The Cahill Group now has about 200 full-time staff, plus at any time it employs between approximately 600 and 1,200 tradespersons in Newfoundland and Lab-rador. It currently also employs about 70 to 80 people in Manitoba and 40 to 50 in Alberta, with the Alberta figure likely to increase again as oil sands activity recov-ers. This diversity of activity is seen as being critical to attracting and retaining talent in an increasingly competitive labour market. The company also seeks to promote itself to new industry entrants through a range of supports to the Memorial University Faculty of Engineering and Applied Sciences.

There are a number of other companies engaged in petroleum industry-related construction and fabrication activity. For example, C&W Offshore provides custom or client design steel and aluminum fabrication, and undertakes some pip-ing work. It was incorporated in 2004 as a spin-off of C&W Industrial in Bay Bulls, Newfoundland and Labrador, on the basis of opportunities that company President Steve Crane identified while he was working in Texas. It was soon undertaking work for the oil industry, fabricating subsea components for the White Rose project for Technip, as well as undertaking specialist work for drilling company GlobalSantaFe. In order to achieve this success, the company had initially to introduce quality and

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safety standards much more rigorous that were common in metal fabrication in the Province at the time. There has been a subsequent requirement to introduce new welding procedures, and C&W estimates it spends $20,000 to $30,000 a year on training.

Subsequent oil industry work has included the fabrication of lifeboat decks for a drilling rig (for TransOcean), subsea assemblies for Husky Energy’s North Amethyst satellite development (for Technip), custom ROV components (for Oceaneering) and components for the Hibernia gas lift (for Wood Group/PSN). C&W Offshore has also undertaken work for projects outside Newfoundland and Labrador, both for the oil industry, in the form of ROV and launch recovery system components for Ocean-eering in Morgan City, Louisiana, and for the mining industry, fabricating steel tanks for a mine in the Northwest Territories. Overall, the oil industry accounts for over 95 percent of C&W’s business, which provides employment to 10 to 25 people. It recently moved into a custom-built 1,500 m2 building, including a 1,100 m2 fabrica-tion space with a 50 tonne crane.

In support of offshore petroleum construction and fabrication activity Pennecon Energy, a major Newfoundland and Labrador-based company has developed and operates, among its other operations, a Marine Base in Bay Bulls, approximately 30 km south of St. John’s. It provides a service facility for a wide range of marine opera-tions, which have included such oil industry activity as drilling rig servicing, rock dumping, chain inspection, pipe inspection and other support for a range of offshore construction and maintenance projects. The clients for this work have included Husky Energy, Technip, Tideway, Transocean, Rowan and GlobalSantaFe.

This work has seen a progressive expansion and improvement in the Marine Base, with increased ocean frontage, water depth, bollards and crane pads, and the construction of an office/warehouse and a garage. An encapsulated sewer system and ISPS-certified security provisions have been put in place. These have helped the facility attract work on both oil and non-oil industry related activity, with the latter including work on fishing vessels and the transhipment of wind turbines. However, the oil industry still provides approximately 90 percent of the base’s business. It em-ploys seven people on a permanent full-time basis, but may provide work for up to 40 individuals (not including client personnel) at times of peak activity. This, together with Penney Energy’s public investments, has made a substantial contribution to this rural community’s economic and social well-being.

Marine activity is also the focus of oil industry work by A. Harvey Group. Since the 1860s, A. Harvey & Company Limited has been one of Newfoundland and Lab-rador’s most successful business enterprises, currently including companies involved in customs brokering, freezers and terminals, home heating and plumbing, manufac-turing and bottling, auto carrying and the operation of Newfoundland and Labra-dor’s largest offshore supply base. It first became involved on offshore petroleum activity in the 1960s, acting as ships agents and customs brokers, and providing crewing, for drillships engaged in exploration off Labrador. While the St. John’s

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Harbour was the home of a number of single-operator supply bases over the years, increased asset sharing has led to A. Harvey becoming the main provider to all the oil companies operating in the Newfoundland and Labrador offshore.

The A. Harvey Offshore Marine Base encompasses almost five hectares of waterfront property in St. John’s Harbour. It has more than 430 m of dock frontage, able to accommodate five offshore supply vessels. The base can provide fuel and water via pipeline, drilling bulks (barite, bentonite and cement), 24 hour-security, and a heavy lift dock capable of 44-tonne lift. It can also provide container rentals and (through sub-contractor Newtrans Equipment Carriers Ltd.) trucking services. A. Harvey has been active in offshore logistics since the start of exploration, with experience in vessel operations, cargo planning, safe rigging and slinging practices, container re-pairs and certification, heavy lift management, freight forwarding, oil spill response, and crane and equipment maintenance. The company’s success in the industry has required, and is attributed to, the adoption of ‘best in class’ quality and safety systems and equipment.

The A. Harvey Offshore Marine Base directly employs 29 company personnel and nine stevedores. Its operations are supported by a five-person management team that is also involved in other A. Harvey business activities. The company is optimis-tic about its prospects, given anticipated activity levels in the Newfoundland and Labrador offshore, and the possibility of work in Greenland. It also anticipates new opportunities related to its waterfront property in Argentia, approximately 130 km west of St. John’s. This is currently being used to support the construction of the Vale Long Harbour nickel processing plant in Long Harbour, and is well-positioned to be involved in other new industrial developments around Placentia Bay.

Not all oil industry activity is in the St. John’s metropolitan area. For example, construction activity for the Hibernia, Terra Nova, White Rose and North Amethyst projects was concentrated around the Isthmus of Avalon and Marystown areas, rig mobilization and refurbishment work has occurred at both Bull Arm and Marystown, and oil transshipment occurs at a terminal near Arnold’s Cove on Placentia Bay.

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Dynamic Air Shelters, based in Grand Bank on the Burin Peninsula, approxi-mately 360 km west of St. John’s, is an example of a company outside St. John’s that is providing goods and services to the oil industry. It is also another company that received its start with the local offshore petroleum industry, but has branched out substantially, both in terms of client-base and geography. It produces inflatable build-ings for an international market. The core products are currently their blast resistant air shelters, but it also builds inflatable shelters for rapid emergency response, as well as for promotional purposes. Involvement with the oil and gas industry has had an important influence on product development, and it was through the petroleum industry that this Calgary-based company first began working in Newfoundland and Labrador in 2002, eventually leading them to move their entire manufacturing operations to the Burin Peninsula town of Grand Bank in 2004.

The company evolved from Aero Dynamics Inflatable Shelters Inc., which was formed in Calgary in 2000. Aero Dynamics originally focused on designing and manufacturing inflatable shelters for promotional events, using technology and engi-neering adapted from hot air balloon production and design. The company began engineering and testing their shelters for explosion resistance in response to growing demand for blast resistant structures for use in the petroleum industry. A turning point came when the company demonstrated that it could produce a structure that could withstand pressures from an explosion of up to four pounds per square inch (psi), with later tests by global petroleum companies concluded that the structure would likely withstand blast pressures of up to nine or ten psi. The product has become well-regarded in the oil industry, with Dynamic air shelters being used on work sites for offices, lunch rooms and warehouses. The company has since been heavily involved with the oil industry internationally, producing structures for refineries and other sites across North America, the Caribbean and Australia. Contracts with oil and gas companies currently represent 50 percent of sales.

The engineering and manufacturing capabilities originally developed to meet oil industry requirements have helped Dynamic market their product to other sectors. Blast resistant structures are also in demand for construction and fabrication indus-tries, and the company has also worked with the Canadian Armed Forces to provide protective structures for use in military operations. The company estimates that about 25 percent of its business comes from construction and fabrication projects, many of which are linked to the oil and gas industry, while the remaining 25 percent is split between military applications, promotional structures, and emergency response shelters. Military applications are expected to be a growing market for Dynamic.

Dynamic Air Shelters has approximately 70 full-time employees in Grand Bank, with 5 to 10 more hired during peak production times. Its annual payroll in the Province varies from year to year is usually in the $1.4 million to $1.8 million range.

As has been seen in Section 4.3, a number of other companies are working directly for the industry developing and delivering the results of R&D activity. For example, C-CORE, which was founded in 1975 under a five-year Devonian Foundation grant to address challenges facing oil and gas development offshore Newfoundland and Labrador and other ice-prone regions, and incorporated as a federal non-profit in

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1992, has become a major international player in the fields of remote sensing, ice engineering and geotechnical engineering. C-CORE is active on every continent, providing research-based advisory services and technology solutions to clients in the natural resource, energy, security and transportation sectors.

During 2008-2010, C-CORE undertook more than 100 R&D projects annually, averaging a total of $11 million in expenditures per annum, as single client or multi-participant joint industry projects (JIPs). C-CORE actively works with the oil and gas industry to define research and development priorities to meet the requirements of this sector. Of the projects executed over the period, some 20 percent directly ad-dressed the Newfoundland and Labrador offshore.

These projects included the following programs:

• Labrador Shelf Scour Program: Repetitive iceberg scour mapping of the Labrador Shelf was identified as a high priority item in the Labrador Development Options JIP, needed to address uncertainty in iceberg scour rates and inform risk assess-ments and design for the development of Labrador gas. The work saw repetitive mapping of the 2003 survey sites, new baseline surveys for future repetitive mapping surveys, and the evaluation of regional variability of iceberg scour re-gime. The data resulting from this exercise can be applied to other areas prone to iceberg scour to calibrate iceberg risk models.

• Subsea Iceberg Risk Assessment and Mitigation (SIRAM) Program: Combining ice and geotechnical engineering, these JIPs are developing engineering models, design procedures and industry best practices for risk mitigation and protec-tion of subsea infrastructure in ice environments. Subsea infrastructure includes wellheads, production trees, manifolds, umbilicals, flowlines and pipelines. The objective of SIRAM is to advance technical capability for assessing risk from ice keel interaction with subsea facilities and developing appropriate mitigation strategies to achieve target reliability levels.

• Pipeline Ice Risk Assessment and Mitigation (PIRAM) Program: The objective of the PIRAM JIP is to advance technical capability for assessing risk from ice keel interaction with pipeline facilities, and developing appropriate mitigation strate-gies to achieve target reliability levels.

• Re-analysis of Shuttle Tankers: This single-client project revisited the results of pre-vious C-CORE research documenting local pressures acting on the hull of shuttle tankers operating between the Jeanne d’Arc Basin and specified market desti-nations. The scope of work included review and reassessment of prior analysis of iceberg risk for FPSOs and shuttle tankers in order to provide a qualitative assessment of how recent data might impact the design ice pressure applicable to the shuttle tankers.

C-CORE is committed to maintaining and vigorously expanding Newfoundland and Labrador’s knowledge base for offshore engineering, particularly ice and geotechni-cal engineering aspects, and to further acceptance of new engineering concepts for

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oil and gas development. This knowledge base includes unique familiarity with At-lantic Canada and a growing understanding of engineering considerations for other harsh cold-ocean environments (including the Barents, Beaufort and Caspian Seas). During 2008-2010, C-CORE began working with industry to secure funding and other support for long-term research and development addressing barriers to devel-opment of hydrocarbon resources in Arctic and other ice and iceberg prone regions. This effort was successful, with initiatives entering the planning stage in 2010.

As of 2010, C-CORE had an annual turnover of approximately $10.5 million, of which oil industry work accounted for 60 to 70 percent. It employs approximately 75 people in St. John’s, and has also opened offices in Ottawa, Halifax and, most recently, Calgary. The company’s total annual payroll in 2010 in Newfoundland and Labrador was approximately $6.7 million.

The Oceanic Consulting Corporation also has a relatively long history under-taking marine R&D in Newfoundland and Labrador. Since 1993, its researchers, engineers, and technical personnel, working with one of the world’s most compre-hensive collections of hydrodynamic research facilities, has made the company a world leader in commercial research and development. Developing out of Marineer-ing in an alliance with the NRC, based around the IOT, Oceanic emerged as an independent entity in 1998.

The predecessor company had undertaken a range of work in the oil industry, including evaluation studies for Global Marine, Noble Drilling and for the Terra Nova FPSO in the late 1990s. There was then a lull in its local oil industry work until it undertook studies for the White Rose project (examining green water impacts, combined wind, current and wave loads, and the effectiveness of disconnectable moorings for the SeaRose FPSO ), and subsequent work on the Hebron GBS and Hibernia offshore loading system. Based on its early local FPSO work, Oceanic has gone on to work on more than 60 FPSO-related projects worldwide for clients such as ExxonMobil, Husky Energy, Single Buoy Moorings, Suncor, Technip and Wood-side Energy. The company’s work has reached as far as the Tatar Strait, the South China Sea, the Sea of Okhotsk, as well as Australia, Brazil, Italy, and West Africa.

Oceanic has carried out a range of physical modeling and numerical simulation research including:

• Offshore structure mooring analysis for FPSOs in waves and ice;• Sea-keeping studies (with one or more floating or fixed structures);• Free running and captive ship manoeuvering tests;• Evaluations of current loads on moored structures; • Hull resistance in level and pack ice as well as in open water;• Ship performance in ridged ice;• Ice abrasion studies; and• Analysis of moorings and risers for vortex induced vibration.

The company now employs more than 40 people. In recent years the oil industry has been responsible for approximately 70 percent of its business, of which approxi-

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mately 70 percent is in export markets. In June 2011, Oceanic was acquired by Fleetway Inc., a member of the J.D. Irving Limited Group of Companies. Company management believe the combined expertise and strength of Fleetway and Oceanic will provide new opportunities for growth in the oil and gas industry, in Newfound-land and Labrador, nationally, and internationally.

The aviation sector is also important to, and a beneficiary of, the oil industry. Pro-vincial Aerospace Ltd. (PAL) started life in 1974 as a St. John’s flying school with fewer than 10 employees but, primarily thanks to opportunities presented by the oil industry, it has developed into a global leader in aerospace and defence. It now provides highly tailored airborne and maritime surveillance solutions, including custom aircraft design and modification, mission system design and integration, and mission operations, training and support. It has more than 900 employees, approxi-mately 750 of them in Newfoundland and Labrador, with domestic operating bases in St. John’s, Goose Bay, Halifax, and Comox, British Columbia, and international operating bases in Barbados, Trinidad and Tobago, Netherlands Antilles, and the United Arab Emirates (UAE). PAL also has stations at 19 airports across Canada as the parent company to Provincial Airlines, the largest regional airline in Eastern Canada.

The company’s involvements with the oil industry started with ice surveillance flights in the early 1980s, working for such companies as Mobil Oil and Husky Bow Valley. The requirement for this service grew as the industry’s activity increased and in the wake of the Ocean Ranger disaster, which resulted in greater safety-related require-ments, including in the area of ice response. This provided a challenge to which PAL responded by adapting military anti-submarine technology to ice surveillance in a harsh environment. This also saw PAL moving away from simple ice data collection to ice management and coordinating appropriate responses.

Time and again, I have seen communities and businesses revitalize themselves through the use of local talent. Allow me to give you a Canadian example of this.

Provincial Aerospace Limited, in St. John’s, Newfoundland and Labrador, has grown from its origins as a small flight school to being a world leader in mari-time and airport surveillance. The company now employs 900 people, sells to 30 countries and has operating bases in the Caribbean and Middle East.

Again, success is rooted in local strengths and global demand. In this case, Provincial Aerospace built upon its hard-won expertise in flying and navigat-ing in difficult Maritime weather conditions to develop leading-edge aerospace engineering. The local know-how was the basis for a global service, with the value added by innovation.

- David Johnston, Governor General of Canada, speaking to a business meeting in Ho Chi Minh City, Vietnam, November 18th, 2011

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With the decline in oil industry exploration activity in the late 1980s, PAL diversi-fied based on its oil-related expertise by moving into fisheries monitoring, providing greater business stability and allowing it to develop Provincial Airlines. PAL has sub-sequently further extended its operations into products and services related to sover-eignty protection, search and rescue, maritime security, environmental management, pollution detection and monitoring, drug interdiction and smuggling, customs and immigration patrol, disaster relief and general law enforcement. This has included, for example, a 2009 $370-million contract with the UAE for the design, modifica-tion, and integration of two Dash-8 Q300 aircraft as well as training and integrated logistics support. A feature of the UAE program is the incorporation of design innovations that PAL developed over its 25 year history modifying and operating maritime patrol aircraft. The company continues to explore the use of new technolo-gies and innovations, and is currently moving forward with commercial applications of military drone technology.

However, notwithstanding this diversification, the oil industry is still directly or indirectly responsible for approximately 70 percent of PAL’s aerospace and defence work. This includes work in Newfoundland and Labrador,the Maritimes and inter-nationally. Since 2008 the last has included work in Greenland for Cairn Energy, Husky Energy and Shell.

Examples of PAL Industry Clients:• AMOCO Canada• British Petroleum• Canterra Energy• Chevron Canada• ExxonMobil• Geco-Prakla• Hibernia Management and Devel-

opment Company• Husky Energy• Jean d’Arc Basin Operations

• Marathon Canada• Norsk Hydro• Petro-Canada• PGS Exploration A/S• Schlumberger Canada• Sedco-Forex Canada• Terra Nova Alliance• Texaco Canada Inc.• Total Eastcan and Development

Examples of PAL Military and Government Clients:• Australian Customs• Barbados Defense Force• Columbian National Police• Government of Canada• Irish Air Corps• Malaysian Air Force• Malaysian Maritime Enforcement

Agency• Mexican Air Force

• Peruvian Air Force• Royal Dutch Navy• Trinidad and Tobago Coast Guard• United Arab Emirates Armed

Forces• US Coast Guard• US Customs Service• US Department of State

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VMT is another, more recent and as yet smaller, Newfoundland and Labrador-based R&D company, a simulation specialist that grew out of the Institute of Ocean Tech-nology. It was founded in 2004 as a result of offshore petroleum industry interest, reflected in funding from PRAC (now Petroleum Research), in developing a lifeboat simulator. It is now engaged in lifeboat (SurvivalQuest), fast response craft (Mission-Quest) and electronic navigation (NetSim) simulation for the oil, defence and com-mercial shipping industries. This includes the development and sales of hardware, software and teaching curriculum.

VMT is also currently investigating opportunities related to the gaming industry, and pursuing business opportunities in foreign markets, including Mexico. It is also seek-ing to build on good relationships that it has established with major international corporations working in aviation (e.g., CAE, a Montreal-based world leader in providing simulation and modelling technologies and integrated training solutions for the civil aviation industry) and defence (e.g., Lockheed Martin). VMT has an an-nual turnover of $1 to $2 million, with the oil industry responsible for approximately 40 percent of this amount. It employs almost 20 individuals in Newfoundland and Labrador, plus it has a small office in Victoria, British Columbia.

The wide range of other oil industry services provided locally include those provided by P.F. Collins, a longstanding family business based in St. John’s. Newfoundland was still a colony of Great Britain when King George V appointed P.F. Collins as the Customs Broker for Newfoundland in 1921. International transport was still largely marine at that time, with St. John’s the key port of entry for Newfoundland, and PF Collins participated in the development of Newfoundland’s first industries and helped arrange the movement of imported goods to points around the island. After Confed-eration, Newfoundland’s trading patterns and transportation systems began to change significantly, providing new opportunities. The company participated in early industrial developments such as the pulp and paper mills, the U.S. military bases, refineries at Holyrood and Come-By-Chance, and the Churchill Falls Hydro development.

In the 1970s, Bernard J. Collins, the current company President, joined the family business and took responsibility for developing its involvement in offshore petroleum exploration activities. During the 1970s, working with operators and government legislators, the company initiated many operational procedures to accommodate the then “customs free zone” on the Continental Shelf. As the company continued to grow, it expanded its range of services and capabilities and its international net-work of agents and affiliates. At the same time, the company initiated an extensive program to incorporate the latest advances in technology and automation into its operations, and it has expanded into the Nova Scotia and Alberta marketplaces.

P.F. Collins now provides custom brokerage, freight services, warehouse and dis-tribution services, project logistics, project administration, marine agency services, immigration consulting, and compliance consulting services. It has annual revenues of approximately $10 million, and employs more than 80 people in Newfoundland and Labrador, with a total payroll of approximately $5 million. Company manage-ment are proud of the fact that more than half of it staff are women, including many in senior positions.

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Atlantic Offshore Medical Services (AOMS) was founded in 1978 and was successful in capturing work on the Hibernia project. AOMS now offers a wide range of harsh environment occupational health and emergency medical services, both onshore and offshore. They include occupational health audits for the assess-ment of occupational health and safety practices, pre-employment examinations, health surveillance programs, periodic medical examinations, independent medical examinations, disability management programs, health promotion programs, work-place drug testing, occupational therapy, vaccinations and immunizations. AOMS also provides response teams for medical emergencies at remote sites, and it has extensive experience in setting up medical services for offshore drilling rigs, includ-ing the design and establishment of sick bays and the provision of medical staff.

The company has provided its services to all the oil companies operating in the Newfoundland and Labrador offshore, and to the North Atlantic Refining Limited refinery in Come-by-Chance, Newfoundland. It also has a Nova Scotia affiliate, Atlantic Offshore Medical (NS) Ltd., with a Halifax, office which has supported ExxonMobil and Imperial Oil on the Sable gas project and Subsea 7 on the Deep Panuke gas project. Drawing on its Newfoundland and Labrador-developed exper-tise, AOMS has also provided medical support for the Sunrise (Husky Energy), Kearl (ExxonMobil) and Albian Sands oil sands projects in Alberta. The oil industry played ‘a huge role’ in the growth of the company, and it has used its expertise to expand into other sectors, working for such organizations as workers compensation commis-sions in both Newfoundland and Labrador and Nova Scotia, and for the Cities of St. John’s and Mount Pearl. However, the oil industry is still responsible for about 65 percent of all company revenues. During 2010, AOMS had between 75 and 105 employees. Of these, 55 were located in Newfoundland and Labrador, and many of those in other locations were from the Province.

East Coast Catering (ECC) was established in St. John’s in 1984, largely on the basis of perceived opportunities related to offshore oil exploration activity. The company now has operations in seven Canadian provinces and in Ireland, and it is the dominant workforce catering service provider to the offshore petroleum industry in Atlantic Canada, supporting three of the region’s four producing projects as well as many of the drilling rigs operating in the region. ECC’s oil industry clients include or have included ExxonMobil, Suncor, Husky Energy, Canship Ugland, Transocean, GlobalSantaFe, Petrodrill, Sedco and Rigco. It has also provided camp facilities for drilling rig refit work at Bull Arm in Eastern Newfoundland.

The company has long recognized that the oil industry is very demanding, for exam-ple in the areas of safety and training; ECC estimates that it spends approximately $5,000 per employee per year on the latter. These standards do not stand still, as exemplified by the recent need to ship food in refrigerated containers. However, the adoption of such standards for the oil industry has been beneficial in bidding work in both that industry and historically less demanding sectors. This has helped the company to expand into other jurisdictions and to get work on mining, hydro and other projects. In the former case, ECC operates four open camps associated with onshore oil activity in Alberta and British Columbia.

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In an early example of work in other industries, ECC provided accommodations, catering and housekeeping services over the life of the Hope Brook gold mine in southwestern Newfoundland from 1992 to 1997. The company has subsequently provided similar services for the construction and/or operation of the Voisey’s Bay nickel mine, the Long Harbour minerals processing project and a range of mining developments in western Labrador, as well as mining projects in the Ontario, Mani-toba, British Columbia and Northwest Territories. ECC’s hydro work has included involvement in the Granite Lake, Gull Island and Star Lake projects in Newfoundland and Labrador. ECC also provided workforce accommodations for the Confederation Bridge construction project in PEI, and East Coast (Ireland) Limited has operated a centre, camps and apartments for asylum seekers for the Irish Department of Justice since 2002. ECC has an annual turnover of approximately $100 million and em-ploys a total of almost 600 people, including approximately 220 in Newfoundland and Labrador.

There are also a number of much smaller companies providing specialist services to the industry. For example, Strategic Concepts is a small highly-specialized com-pany that was originally established in 1990 to assist small businesses with business planning and marketing. However, the company’s principals soon recognized that there were opportunities associated with forecasting and demonstrating the econom-ic impacts of major resource development projects for their proponents and inter-ested stakeholders. The company has subsequently expanded its offerings to include the following services re such projects: cash flow and economic impacts analysis; the provision of strategic advice re advancing projects; the development and provision of software to monitor project benefits and commitments, and contacts management; specialist studies, for example of project labour requirements and potential supply; and the negotiation and implementation of Impact and Benefits Agreements.

The local oil industry clients for Strategic Concepts services have included Hibernia, Hebron, White Rose and Petroleum Research Atlantic Canada, and local success has led to its benefits monitoring software being adopted for projects elsewhere in Canada, including the Mackenzie Valley Gas Pipeline and Kearl oil sands projects for ExxonMobil and the Surmont oil sands and Parson’s Lake gas projects for Cono-coPhillips. However, non-oil projects, such as the Vale’s Voisey’s Bay Mine and Mill in Labrador, have become increasingly important such that, of late, work for the oil industry has only been responsible for 20 to 25 percent of the company’s turnover.

In another example of a small specialist company working in the oil and other indus-tries, Canning & Pitt was established in 1991, largely to support the Hibernia de-velopment project in its relations with fisheries interests. Since that time it has worked for such oil companies as Husky Energy, Suncor, ConocoPhillips, ExxonMobil and Newfoundland Transshipment Limited, and such seismic companies as WesternGe-co, PGS, and GXT, as well as for the Canadian Association of Petroleum Produc-ers and the C-NLOPB, developing and supporting operational management plans and compensation programs, providing consultation services, and assisting in the development of environmental assessments. This has included seismic-related work in Nova Scotia, the Beaufort Sea, and Greenland. While the oil industry accounts for approximately 80 to 85 percent of the company’s business, it has diversified into

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work on minerals processing and subsea transmission line projects. Canning & Pitt has three full-time employees, but also uses a wide range of local sub-contractors in such areas as geomatics.

As was noted in the introduction, the oil industry supply and service sector is not just comprised of companies engaged in industry-specific activity. For example, Greg Locke was originally a freelance photographer and reporter, working for the Globe and Mail, Maclean’s and other newspapers and magazines. He increasingly became involved in corporate photography, including for such companies as Ford, Toyota and Imperial Oil, while based in Ottawa. He moved back to Newfoundland in 1988 and in the 1990s Greg found himself involved in local photography for the oil industry, including taking pictures of Hibernia construction site preparation for HMDC. This led to work for Chevron, Petro-Canada, GJ Cahill, Texas Instruments, Schlumberger, Baker Hughes, and other companies engaged in oil activity, and in-cludes many of the photographs used in this report. Greg’s recent work has included what he calls ‘engineering telemedicine’, taking photographs of damaged offshore equipment for evaluation by experts onshore.

Working in such a demanding industry has driven Greg’s professional development, further expanding his business. For example, Greg has had to acquire suitable equipment for working offshore (where, for example, flash cannot be used because it might set off sensors) and to maintain current safety training certification for work-ing offshore. Having these has helped Greg get work at other types of industrial sites, within and outside the Province, including when undertaking work for such companies as Teck-Cominco, Sandwell Engineering, and Schneider Electric. The importance of the oil industry to Greg Locke has been quite variable, representing between 10 and 60 percent of his total business income.

As was noted in the introduction to this chapter, and exemplified by the NOIA mem-bership, the oil industry requires a very wide range of other services, including real estate, hotel accommodations and office catering services. In the case of Exit Re-alty on the Rock, the company’s Owner and Franchisee, Anne Squires, worked in personnel relocation for the Hibernia Management and Development Company for many years before setting up her own company, a franchise of the Mississauga, Ontario, Exit Realty Group, in 2004. Exit Realty on the Rock has rapidly grown from five employees at the end of 2004 to nearly 100, in seven offices on the Island and

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in Labrador, buying, selling and leasing residential and commercial property. Draw-ing on Ms. Squires’ earlier experience, the company has a strong focus on oil sector corporate relocation, including between such cities as St. John’s, Houston, Calgary and Fort McMurray, and identifying commercial space for oil, supply and service companies.

Based on this local success and oil industry activity, Exit Realty on the Rock has re-cently become Exit Realty’s corporate sub-franchisee in Alberta, providing a range of management, training, planning and other assistance to five existing franchisees, as will as seeking to expand the Exit Realty presence and market share in that province.

The Murray Premises Hotel in downtown St. John’s opened in 2001 with 28 rooms, but it has subsequently expanded to its current 67 rooms. It immediately attracted oil industry clients, although it is only more recently that it has targeted the industry, through its membership of NOIA and agreements with such companies as Suncor and ExxonMobil. In 2010, the industry was directly responsible for approxi-mately 20 percent of its business, and it is likely that many other guests were in St. John’s as a result of oil industry events and activity. The operators of the hotel also believe it has benefitted, and will continue to benefit in the future, from the fact that St. John’s is ‘a booming corporate town’ as a result of resource industry activity and revenues. The Hotel currently provides employment to 14 people.

The Hungry Heart Café is a St. John’s-based food service social enterprise that is an arm of Stella Burry Community Services, providing employment and education services for adults and youth who have experienced personal or family breakdown brought about by mental health issues, addictions, abuse, illiteracy and the lack of education as well as poverty. The Café opened in 2008, and currently employs nine core staff and six students. It was initially only as a retail operation, but it subsequently moved into catering, with one of the first clients being the Hibernia Management and Development Company. It has subsequently catered meetings, courses and other events for such oil industry companies as ExxonMobil, Chevron, Hebron, Husky, Suncor, Statoil, Schlumberger and Transocean, with the oil industry being responsible for 40 percent of the Hungry Heart Café’s catering sales. As part of Chevron’s multi-year partnership with Stella Burry Community Services, funding is provided annually for a training program at the Hungry Heart Café

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6.0 CONCLUSIONDuring the 2008-2010 period, the Newfoundland and Labrador offshore petroleum industry saw further expansion, with increased expenditures in exploration, devel-opment and production. Although total production from the main fields decreased, additional investments in satellite fields offset these declines by the end of the study period. Furthermore, while the previous study period (2005-2007) was character-ized by a decline in development expenditures due to the transition of White Rose from development to production, the current period saw the end of this lull as a result of the satellite developments and the start of work on the Hebron project.

By 2010, the industry was responsible for approximately 33 percent of provincial Real GDP and resulted in the Province’s average personal income being 6.5 percent higher, the provincial unemployment rate being 1.8 percent lower and the Province’s population 16,400 greater, than they would have been without the industry. As was noted in the introduction to this report (Section 1.0), these effects are separate from and in addition to those resulting from the substantial taxes and royalties that oil companies paid to the Government of Newfoundland and Labrador.

Given its ongoing operations, development and exploration activity, and its con-tinued investments in infrastructure, education, training and R&D, the offshore petroleum industry continued to make an important and increasing contribution to Newfoundland and Labrador’s economic diversification and sustainability, not least by facilitating access to opportunities in other industries and jurisdictions. This is demonstrated, not least, by the company case studies provided in this report.

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7.0 REFERENCESC-NLOPB (Canada-Newfoundland and Labrador Offshore Petroleum Board). 2008. ‘Annual Report: 2007 – 2008.’

C-NLOPB (Canada-Newfoundland and Labrador Offshore Petroleum Board). 2009. ‘Annual Report: 2008 – 2009.’

C-NLOPB (Canada-Newfoundland and Labrador Offshore Petroleum Board). 2010. ‘Annual Report: 2009 – 2010.’

Community Resource Services Ltd. 2003. ‘Socio-economic Benefits from Petroleum Industry Activity in Newfoundland and Labrador’, report prepared for Petroleum Research Atlantic Canada, St. John’s, NL, and Halifax, NS.

Jacques Whitford Ltd. 2005. ‘Socio-economic Benefits from Petroleum Industry Activ-ity in Newfoundland and Labrador, 2003-2004’, report prepared for Petroleum Research Atlantic Canada, St. John’s, NL, and Halifax, NS.

Stantec Ltd. 2009. ‘Socio-economic Benefits from Petroleum Industry Activity in Newfoundland and Labrador, 2005-2007,’ report prepared for Petroleum Research Atlantic Canada, St. John’s, NL, and Halifax, NS.

NLDF (Newfoundland and Labrador Department of Finance). 2012. ‘The Macroeco-nomic Impacts of the Offshore Oil Industry on the Economy of Newfoundland and Labrador, Update 2012,’ report prepared for Stantec.


Economic Research and Analysis Division (Economics and Statistics Branch) Department of Finance June 5, 201235

APPENDIX A The Macroeconomic Impacts of the Offshore Oil Industry on the Economy of Newfoundland and Labrador Update 2011

Prepared for Stantec By Economic Research and Analysis Division (Economics and Statistics Branch) Department of Finance Government of Newfoundland and Labrador

February, 2012



I. INTRODUCTIONThe purpose of this study is to provide current estimates of the economic impact of the offshore oil industry on the provincial economy and builds on previous stud-ies conducted by this Division. The original study, which was conducted in 2003, produced impacts for the period 1999 to 2003 and was updated twice afterwards – once in 2005 and again in 2008. This study examines impacts on key indica-tors such as gross domestic product (GDP), income, and employment for the period 2002 to 2010. Over this period the oil industry has been expanding. Consequently, there have been fluctuations in production and development related activity from year-to-year. This assessment measured the impacts of the offshore oil industry over the nine years from 2002 to 2010 and provides the average annual impacts over the period.

The following sections describe the economic models used in the analysis, the input data and the methodology followed in applying the models. The paper ends with a presentation and discussion of the results.

II. ECONOMIC MODELSTwo Department of Finance models are used in this impact assessment: the New-foundland and Labrador Econometric Model (NALEM) and the Newfoundland and Labrador Input-Output Model (NALIOM).

NALEM is a detailed model of the relationships between key economic variables affecting the provincial economy and is used by the government of Newfoundland and Labrador for economic forecasting and to assess the economic impacts created by major development projects as well as government policy changes. Additional information on NALEM is provided on the next page.

The NALIOM model simulates the relationships between commodity outputs and commodity inputs at an industry level under the assumption of constant returns to scale (i.e. that the proportion of factor inputs used per dollar of output remains constant). NALIOM provides estimates of the GDP, employment and labour income impacts for 727 commodity purchases distributed over 300 industries. The model’s strength lies in its ability to capture backward linkages (i.e. indirect impacts that arise from the production of intermediate inputs by other industries).

NALIOM is used in this study to obtain the indirect oil industry impacts. These indi-rect impacts are combined with the direct, or first round, impacts to be used as data input to NALEM. NALEM captures the induced impacts (i.e., impacts related to the spending of workers who are directly or indirectly employed as a result of oil indus-try activity). The direct, indirect and induced impacts are then summed to determine the total economic impacts of the offshore oil industry on the provincial economy.



A BRIEF DESCRIPTION OF THE NEWFOUNDLAND AND LABRADOR ECONOMETRIC MODEL (NALEM)

NALEM is a macroeconomic model of the economy designed to capture the fun-damental relationships among major economic variables affecting the provincial economy. NALEM provides a representation of the current structure (e.g. basic economic relationships) of the provincial economy. As this structure changes (i.e. EI program changes, tax harmonization, collapse of the groundfishery, development of the oil and gas industry, etc.) the model is modified to capture the new economic relationships.

NALEM contains over 370 mathematical equations and 600 data series which are designed to represent key aspects of the provincial economy, and to capture the relationship between certain socioeconomic variables. For example, the level of consumer spending is related to the level of income which consumers have at their disposal. Anything which affects consumers’ disposable income (i.e. higher/lower income taxes, reduced EI benefits, job losses/gains, etc.) can be expected to have an impact on the level of consumer spending. Thus, certain NALEM equations are designed to measure or quantify (e.g. “model”) the relationship between major categories of consumer spending and income levels, which in turn are linked to other variables in the model. For example, changes in consumer spending can in turn affect government revenues, employment levels, investment spending and so on. NA-LEM is organized into 10 different sectors. Consumer spending, residential construc-tion, business investment, government spending, exports, and imports comprise the six expenditure sectors essential to the determination of GDP and other key econom-ic indicators. The remaining four sectors cover income and output, demographic and labour market activity, prices and wages and government revenue. The government revenue sector deals with the revenues of all levels of government.

NALEM is used to produce annual forecasts for all of the main indicators of provin-cial economic activity, including GDP, personal income, labour force, employment, consumer spending and exports. Forecasts for detailed components and determi-nants of the main economic indicators are also available. Forecasts of economic indicators which are largely determined by factors outside of the provincial economy (i.e. interest rates, exchange rates, certain commodity prices, etc.) are generally obtained from external sources such as national forecasting agencies.

NALEM has been in use since 1990 and is maintained by the Department of Finance’s Economic Research and Analysis Division.



III. DATA USED AS INPUTData from Statistics Canada and industry sources were used as inputs for the analy-sis. The highlights are summarized in Table 1. are summarized in the table below:

IV. MODEL SIMULATIONS

IV.1 INDIRECT IMPACTS FROM NALIOM

A significant portion of the local benefits from oil industry activity accrues to com-panies providing goods and services to oil companies. Supplier impacts, or indirect impacts, are dependent on non-wage operating spending and capital spending by oil companies. NALIOM was used to obtain indirect employment, GDP and labour income impacts. The main types of businesses providing services to the oil indus-try included services incidental to mining and oil and gas; miscellaneous business services; air transport; water transport; wholesaling; storage; and architectural, scientific, and engineering services. Annual direct and indirect nominal GDP impacts averaged roughly $7.6 billion and annual direct and indirect employment impacts averaged roughly 9,200 person years. In the most recent year examined, 2010,

Table 1 Direct Impacts of Offshore Oil Industry

2002 2003 2004 2005 2006 2007 2008 2009 2010

Capital Costs ($ Millions)

Exploration 55.9 101.2 24.2 119.5 241.4 122.3 92.1 384.3 333.9

Development 492.8 551.0 616.8 436.4 2.3 54.4 252.9 449.9 315.5

Production 515.9 474.2 457.4 507.4 723.6 604.3 633.0 610.1 530.2

Total 1064.6 1126.4 1098.4 1063.3 967.3 781.0 978.0 1444.3 1179.6

Employment (person years)

Development 408 1508 2192 962 15 100 326 328 204

Production 1728 1761 1680 2396 2924 2552 2653 2901 3021

Total 2136 3269 3872 3358 2939 2652 2979 3229 3225

Barrels of Oil Production (Millions)

104.3 122.9 114.8 111.3 110.8 134.5 125.2 97.7 100.7

Operating Costs ($ Millions)

233.8 240.9 233.2 282.3 621.0 602.7 701.4 707.1 686.9

Wages/Salaries & Employee Benefits ($ Millions)

Exploration 33.3 130.8 198.9 77.8 1.2 8.1 28.7 29.2 19.6

Development 141.1 152.7 152.4 193.7 225.3 207.4 233.5 258.6 291.1

Total 174.5 283.5 351.3 271.4 226.4 215.6 262.2 287.8 310.8



direct and indirect nominal GDP impacts were a little higher than average ($8.5 bil-lion) because development activity was significant and oil prices were strong. Direct and indirect impacts are key inputs necessary for the NALEM model simulation.

IV.2 NALEM SIMULATION

NALEM was used to simulate the total economic impacts of the offshore oil industry during the reference period. The simulation was performed for the 2002 to 2010 pe-riod using both direct inputs and indirect impacts calculated from NALIOM. NALEM allowed the calculation of induced economic impacts plus it also allowed impacts to be measured across a broader array of indicators, such as personal income, retail sales and population that are not available from NALIOM. These results are summa-rized in Table 2.

V. MACROECONOMIC RESULTSThe macroeconomic impacts which are presented at the end of this paper point to a substantial impact on the provincial economy. Nominal GDP was, on average, roughly $7.8 billion per year higher over the 2002 to 2010 period and $8.8 higher billion in 2010 as a result of offshore oil activity. Capital spending and economic output related to the oil industry (including indirect and induced impacts) generated 34.8% of the province’s nominal GDP between 2002 and 2010. In 2010 the share was 33.3%. GDP represents the business and labour income earned within the geo-graphic boundaries of the province.

It should be noted, however, that much of the company profits earned in the oil industry accrues to non-resident companies. This is the case with virtually all types of external investment in a small economy. Thus, business income directly related to the industry generally does not accrue to residents and therefore has limited spill-over onto other economic impacts. Consequently, impacts on other economic indicators such as personal income and employment are smaller than the GDP impacts.

Personal income was roughly $950 million per year higher over the reference period as a result of the oil industry (6.5% of total personal income). The impact was somewhat higher in 2003 and 2004 at roughly 7.7% and 7.6% due to the fact that construction activity on the White Rose project was at its peak. Impacts declined fol-lowing the completion of White Rose construction, but personal income impacts have increased in recent years due to strong wage growth and increased activity related to the development of North Amethyst.

The income impacts mainly reflect the boost to labour income resulting from the oil industry’s high wage jobs as well as labour income from spinoff employment (indi-rect and induced). Annual personal disposable income, which is personal income after payment of direct taxes (income tax, EI, CPP premiums), was on average $750 million higher over the 2002 to 2010 period. Consequently consumer spending in the form of retail sales was roughly $400 million or 6.4% higher on average.



In fiscal year 2010-11 the Government of Newfoundland and Labrador received $2.4 billion in offshore oil royalties. The Province also received roughly $120 million in income taxes and consumption taxes from labour income generated by the oil industry in 2010. Corporate income taxes paid on oil company profits are another significant source of revenue for the Provincial Government, but this information is confidential and not available for this report.

The estimated annual employment impact averaged roughly 13,000 over the refer-ence period (6.1% of total employment). On average, the unemployment rate was 2.0 percentage points lower as a result. The decline in unemployment would have been greater except that increased employment, higher average wages and higher population encouraged more labour force participation. The rise in the labour force was about two-thirds as large as the gain in employment.

Population impacts are more difficult to model. Any increase in economic activ-ity and employment in the province will tend to reduce out-migration and increase in-migration. Net migration is modelled in NALEM as a function of the difference in average wages and employment rates between Newfoundland and Canada. Both of these differences were smaller than they would have been in the absence of oil industry activity. Changes in migration led to a population that was roughly 3.2% higher in 2010 due to oil industry impacts. It should be noted, however, that since migration is a difficult variable to predict there is a high margin of error associated with the estimated population impact. Consequently, a number of other indicators that are affected by changes in population, such as labour force, the unemployment rate and housing starts, also have a higher margin of error.

Despite the uncertainty surrounding population impacts, the analysis does show that the offshore oil industry is making a substantial contribution to the Newfound-land and Labrador economy, particularly in relation to GDP and employment. The contribution to GDP from oil production will likely decline in the short-term as all active projects are beyond peak production levels and natural production declines are anticipated going forward. However, other production related benefits such as employment and personal income are not expected to be impacted significantly by the production declines. In addition, development impacts are expected to increase as construction activity related to Hebron ramps up in the coming years.



Table 2 Economic Impacts of Offshore Oil Industry, Newfoundland and Labrador, 1999-2007

2002 2003 2004 2005 2006 2007 2008 2009 2010 Average

GDP ($ Millions) 4144 5138 5833 7267 8141 10261 12875 7668 8762 7788

Share of Total (%) 27.7 31.1 32.8 35.8 36.2 38.6 44.3 33.3 33.3 34.8

Real GDP Chained ($ Millions) 4088 4710 4439 4537 4641 5356 5117 4345 4365 4622

Share of Total (%) 27.3 29.6 28.2 28.1 27.9 29.4 28.3 26.4 25.1 27.8

Personal Income ($ Millions) 663 957 979 930 935 866 986 1152 1130 955

Share of Total (%) 5.6 7.7 7.6 7.0 6.7 5.9 6.3 6.9 6.5 6.7

Labour Income ($ Millions) 497 718 734 698 701 650 739 864 848 717

Share of Total (%) 6.9 9.4 9.2 8.4 8.1 7.0 7.5 8.0 7.5 8.0

Other Income ($ Millions) 166 239 245 233 234 217 246 288 283 239

Share of Total (%) 3.5 5.0 5.0 4.7 4.5 3.9 4.6 4.8 4.6 4.5

Disposable Income ($ Millions) 522 752 766 726 738 681 779 923 911 755

Share of Total (%) 5.6 7.7 7.6 7.0 6.7 5.9 6.3 6.9 6.5 6.7

Retail Sales ($ Millions) 292 421 429 407 413 381 436 517 510 432

Share of Total (%) 5.4 7.3 7.5 7.0 6.9 5.8 6.2 7.3 6.9 6.7

Housing Starts ($ Millions) 104 150 153 145 148 136 156 185 182 151

Share of Total (%) 4.3 5.6 5.3 5.8 6.6 5.1 4.5 6.0 5.1 5.4

Employment (‘000s) 11.0 14.5 13.6 13.4 13.5 12.0 12.9 14.0 12.8 13.1

Share of Total (%) 5.3 6.9 6.4 6.3 6.3 5.6 5.9 6.6 5.8 6.1

Labour Force (‘000s) 7.5 10.8 9.7 10.0 10.6 9.1 9.8 10.9 9.8 9.8

Share of Total (%) 3.0 4.3 3.8 4.0 4.2 3.6 3.9 4.3 3.8 3.9

Unemployment Rate(%) -2.0 -2.3 -2.3 -2.1 -1.9 -1.7 -1.8 -2.0 -1.8 -2.0

Population (‘000s) 12.6 18.0 16.1 16.6 17.7 15.1 16.4 18.2 16.4 16.3

Share of Total (%) 2.4 3.5 3.1 3.2 3.5 3.0 3.2 3.6 3.2 3.2

AC-DOC-FRE-2009FEB19-P1V1

STANTEC Consulting Limited 607 Torbay Road

St. John’s, NL A1A 4Y6

tel: (709) 576-1458

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