The construction site of the hydroelectric facility at Muskrat Falls on Tuesday, July 14, 2015. THE CANADIAN PRESS/Andrew VaughanPRESS/Andrew Vaughan

We’ve all heard about that special connection between Newfoundland and Alberta — stories of hard-working labourers from the island province flying out to Fort McMurray to make their fortunes in the oilsands.

During the good years, the money was great and remittances flowed in waves back to Newfoundland, boosting incomes and allowing people to build homes, buy pickup trucks and have the prosperous lifestyles most Canadians crave.

Unfortunately, the east-west linkages went deeper. When politicians in Newfoundland hit their own gusher in offshore oilfields like Hibernia, they looked to Alberta for guidance. What to do with the billions in windfall royalty revenues that in 2008 turned Newfoundland and Labrador into a “have” province for the first time after decades of equalization payments from Ottawa?

Sock it away for a rainy day like those boring Norwegians? Hell no. We’ll have a big party like our buddies in Alberta.

At one point in the middle of the last decade, the Newfoundland government was swimming in revenue, collecting money from royalties, equalization payments and the Atlantic Accord all at once, according to Russell Williams, an associate professor of political science at Memorial University. As much as 30 per cent of revenues came from royalties.

“Most of the money went into increased spending and tax cuts,” said Williams, adding that Newfoundland tried to emulate Alberta and Saskatchewan by becoming a low income-tax jurisdiction. Spending shot up on things like infrastructure and pay rises for public sector workers. The province even started to give out $1,000 baby bonuses to boost low fertility rates.

Then, as we all know, oil prices tanked. The impact on Newfoundland has been nothing less than catastrophic. In its recent budget, the new provincial government said the 2015-16 budget deficit will reach $2.2-billion, or 7.3 per cent of GDP — a figure that echoes Greece’s awful situation, and makes Alberta looks good in comparison.

Taxes have been raised across the board; the HST has been hiked to 15 per cent from 13 per cent, the gasoline tax is up 16.5 cents per litre and the province is introducing a highly regressive “deficit reduction” income tax levy that will cost $300 for a taxpayer earning $25,000 a year. Public servants will be laid off. Half the province’s libraries will close. Those $1,000 baby bonuses are long gone.

The oil boom never created many permanent jobs. Once the big offshore platforms are built, it takes relatively few people to operate them. The oil boom never created many permanent jobs. Once the big offshore platforms are built, it takes relatively few people to operate them.

Yet even if it manages to get through the current crunch, Newfoundland’s problems are far from over. Its prospects for sustained economic growth remain poor. The province has the oldest population in the country and its population continues to stagnate; at 525,000, it’s the same as it was at the end of 2011 — despite the oil boom — and it’s actually a few thousand lower now than it was in 1971.

Unemployment in Newfoundland is stubbornly high at 13.1 per cent. As Williams notes, the oil boom never created many permanent jobs. Once the big offshore platforms are built, it takes relatively few people to operate them.

And there’s a huge (white) elephant in the room — the Muskrat Falls hydro-electric development in Labrador. Like Alberta’s oilsands projects, Muskrat Falls is costly to develop and a long way from its markets. And its economic justification has been undermined by $40 a barrel oil.

Announced in 2010 by then-premier Danny Williams, the project is billions over budget and construction is well behind schedule. It includes a dam on the Lower Churchill River and a series of transmission lines that will bring power to the island of Newfoundland through an undersea cable, then across to Cape Breton though another submarine cable and through Nova Scotia and New Brunswick to New England.

The project, now expected to cost $9.2 billion, was always based on iffy economics and was only made possible by Prime Minister Stephen Harper’s 2011 election promise of a federal loan guarantee, giving the project Ottawa’s sterling credit rating on its bonds. That will save Nalcor, the Newfoundland Crown corporation that’s in charge of the project, hundreds of millions in interest costs — but it also means federal taxpayers are on the hook if the project fails.

As with royalty revenues, low oil prices are exacting a cost here as well. Muskrat Falls was justified originally by the claim that its power would be cheaper than continuing to operate the oil-fired power station at Holyrood that currently supplies much of the province’s power. That claim was based on oil costing $95 a barrel.

Nalcor has signed an agreement with Emera, which owns Nova Scotia Power, to sell some electricity to the province, but decided that it would sell much of the remaining power to New England on a spot basis. That way, it figured it could emulate Hydro-Quebec — which still makes a fortune buying cheap power from the original Churchill Falls project in Labrador and selling it dear to the Americans.

What Nalcor failed to understand is that the world has changed since the 1970s. With the advent of cheap shale gas, energy conservation measures and continued competition from Hydro-Quebec, New England is awash in electricity options and spot prices are likely to remain low for a long time.

That means Newfoundland ratepayers will end up paying much higher power rates once the dam is in operation and the Holyrood power station is shut down. With Nalcor still sucking up cash — the province will have to add another $1.3 billion to the project this year — the new government last week pushed out Ed Martin, the Crown corporation’s CEO, and promised tighter oversight of the project.

Finance Minister Cathy Bennett admitted that “the financial risks of cancelling that project right now are so enormous that we’re stuck in a situation where we have to make strong decisions about how we’re going to manage things.”

“They simply have a project that’s way too expensive given their revenue base,” said Gordon Weil, a U.S. energy consultant who has followed the project for years. “It’s a good project that they can’t afford.”

As with the oilsands, the future of this megaproject may be on the line over the next few years. And as all Canadian taxpayers are on the line as well, thanks to those loan guarantees, we’ve all got reasons to worry about whether Newfoundland can dig itself out.

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