Chilly days on the Rock

Continuing the trend of recent years, Newfoundland and Labrador will feel the damper of lower oil prices. But some mining may benefit from the lower loonie

By: Gavin Will
January 29, 2016 November 9, 2019
00:00

Newfoundland and Labrador continues to be hit hard by declining crude oil prices. The public sector in particular is suffering, as the newly elected provincial government faces a $1.9 billion deficit for 2015-16.

Even this amount may prove conservative, given that the government’s December fiscal update used a figure of US$48 a barrel for oil when preparing projections. Several years of deficit financing now seem inevitable – unless the price of oil rebounds.

A $2.4 billion deficit is forecast for 2016-17 now, based on a benchmark price of US$51 a barrel for Brent crude. Borrowing is expected to top $2 billion a year until 2021 if the status quo remains. Indeed, using the government’s figures, the provincial debt is forecast to balloon to almost $23 billion by 2021, up from $12.4 billion in 2016.

While Premier Dwight Ball is hoping for growth in non-oil industries, he may be looking at a distinctly short list of possibilities. Contraction among Alberta’s oilsands producers has resulted in the layoff of thousands of workers, many of whom migrated to Alberta from rural communities in Newfoundland.

At the same time, peak construction related to building the Hebron oil platform and Muskrat Falls hydroelectric facilities occurred in 2015, which means thousands more workers face unemployment this year and next.

Overall, the government predicts capital investment in the province from all sources will decline by 5% in 2016, with further reductions in both 2017 and 2018. Investment is forecast to scale back to $7.2 billion from $11.7 billion between 2015 and 2018.

Unemployment, which topped 12% in 2015, is expected to remain steady in 2016 before increasing to 15% in 2018.

The province’s mining sector faces question marks, particularly in western Labrador, where Rio Tinto PLC operates an iron ore mine. The company has spoken publicly of the need to reduce costs at the mine to cope with declining markets in China.

However, the lower Canadian dollar (C$) may offer relief to western Labrador. A report from Royal Bank of Canada predicts a quick recovery for the province’s mining sector, pointing out that shipments from Labrador grew by 16% in 2015. The long-term future for the oil and gas sector appears bright, particularly in the Flemish Pass, where the most recent sale of exploration rights attracted bids totalling $1.2 billion.

The current downturn is reflected in housing starts, which recorded a decline of about 22% in 2015. The province is expecting growth in the tourism sector and the export-focused fishery industry due to the weaker C$.

NEWFOUNDLAND AND LABRADOR

Population: 528,188

GDP, 2014 ($bil.): 33.5

GDP, % change: -4.2

2015-16 deficit ($bil.): 1.9

Estimated net debt ($bil.): 12.4

Per capita wage growth, % change, 2015: 4.3

Household disposable income, per capita: $34,132

Figures from latest available reports/estimates

Sources: Conference Board of Canada; Province

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