Rick Farrell was among hundreds who lost their jobs in December when the shipyard where they worked finished making a gigantic module for Newfoundland and Labrador’s fourth offshore oil field – Hebron.
Unlike previous years when unemployed tradespeople could easily find work in Alberta, that was no longer an option with oil prices plunging.
The layoffs hit Mr. Farrell’s hometown of Marystown hard and rippled across Newfoundland’s Burin peninsula, hurting the local businesses and small communities that dot the province’s southern coast.
“It was the biggest layoff we had in many years,” said the 52-year-old Mr. Farrell. “We could be a year without work in sight.”
After riding the oil boom for more than a decade, Newfoundland and Labrador is facing a dire economy and a return to the days when it was the archetypal “have-not” province.
It’s getting hit on all sides. Multibillion-dollar projects such as Hebron are either completed or close to completion. Iron ore mines have shuttered and the weak oil price has pushed the province’s deficit to a staggering $2-billion – a record amount.
And more pain is on the way. Tax hikes and job cuts are expected when the province unveils its coming budget. A fifth of the energy sector has been laid off and the misery has spread to other parts of the economy, from cabbies to waitresses. The unemployment rate is 14.1 per cent, the highest among the provinces.
“It’s just getting worse,” said Bernie Johnson, a welder in St. John’s who has been out of work for nearly a year. “Everything has dried up. There are more layoffs coming.”
‘Have-not will be no more’
Ever since it joined confederation in 1949, Newfoundland and Labrador has been searching for a way to earn its keep.
First came fisheries, which were decimated with the depletion of cod stocks and ensuing moratorium in 1992. Then there was Churchill Falls, a massive hydroelectric project that was supposed to provide untold wealth, only to end in a bad deal with Quebec.
And then there was oil.
“It was sold to you that this is the saviour,” said Sean Wiltshire, 45, who has lived in Newfoundland most of his life and runs Avalon employment agency. Ingrained in Mr. Wiltshire’s memory are the words from former premier Brian Peckford that “some day the sun will shine and have-not will be no more.”
Billions of barrels of crude lie beneath the ocean off Newfoundland’s shores. Over the two to four decades it took to turn the province’s mammoth oil discoveries into production, the price of crude swung wildly. It traded around $30 (U.S.) a barrel in the early 1980s, dropped below $10 in 1986 and rose to more than $100 in 2014. Now it is trading around $40.
The White Rose, Terra Nova and Hibernia offshore oil fields were already in production and crude was soaring when former premier Danny Williams fought Ottawa and the energy industry for a greater share of the oil revenue.
The province went into overdrive after Mr. Williams and Exxon Mobil Corp. reached an agreement in August, 2007, to build Hebron – a $14-billion project.
At the same time as Hebron was being developed, Vale SA’s nickel processing plant in Long Harbour and the government’s Muskrat Falls hydroelectric facility in Labrador were also under construction.
To accommodate the hundreds of additional labourers, engineers and executives moving to St. John’s to work on these projects, new offices, housing and restaurants popped up, including upscale restaurants and luxury condos with a view of the harbour.
“When oil started to rise, everything was possible. New jobs, high-paying jobs. Things started to change,” Mr. Wiltshire said. “People felt like we were playing catch-up. You had better opportunities when oil was higher.”
The average weekly paycheque in the province rose 70 per cent to $991 (Canadian) over the boom years, higher than the national average. For miners and oil-and-gas workers, average earnings skyrocketed to $2,048 a week. People started migrating to the province for the first time in decades.
The influx of workers boosted demand for housing: The average house price increased to $284,000 from $104,000 over the oil bull market, according to Canadian Real Estate Association data.
“There would be bidding wars. Here. I mean I had never heard of that,” said Elizabeth Lawrence, director of strategy with the City of St. John’s.
The decade-long bull market in oil and other commodities propelled the province into “have” status in 2008 for the first time in its history. Instead of receiving payments from Ottawa to help pay for services, Newfoundland and Labrador started contributing to the equalization pot.
Darren Calabrese for The Globe and Mail
Delinquent debt on rise
Lofty oil prices overshadowed some early warning signs. A slowdown in the iron ore industry started a few years ago and one of Labrador’s key iron ore mines was closed in 2014, putting hundreds of people out of work.
Then as the price of oil dropped, companies and projects in the energy sector that had looked so promising were suddenly announcing layoffs and closings. Nearly 3,000 Newfoundlanders and Labradorians in the mining and oil industry lost work over the past year and a half and prospects are grim.
Bernie Johnson has applied for nearly 200 jobs in and outside of his industry. “I still haven’t got a phone call from nobody. It’s bad,” he said.
A single father, Mr. Johnson said he is worried all the time. “Every day to every day you are looking at your bank account. Literally,” he said. Mr. Johnson paid for his offshore oil training on the promise from a local company that he would get hired. But once he completed the training last summer, there were no jobs.
Like many others, Mr. Johnson is facing rising debts. Delinquency rates on loans and credit cards rose 20.5 per cent in St. John’s and 12 per cent across the province last year.
Signs of the slowdown can be seen almost everywhere. On a recent February evening, the main street in downtown St. John’s was desolate. Most restaurants were empty with servers hovering around the bar.
Andrea Maunder, the owner of Bacalao, a downtown restaurant, said regular customers come in less and don’t order as much. Christmas dinner parties became Christmas lunches. She has had to cut her staff’s hours.
Jackie Anderson, who has worked in the restaurant business for two years, said February is normally a slow month but not this slow. Now she sometimes doesn’t get a single table for lunch.
One of her regular customers used to order an appetizer, a main dish and a drink. Now he orders soup and water. She used to get 15 per cent in tips and recently had a customer tip her 7 per cent. “That’s how bad it is,” she said.
Cabbies have seen their businesses drop by as much as half. One driver was out for 19 hours and made $3 an hour. Cabbies used to be able to count on more lucrative trips to the airport but those customers disappeared along with the direct flights between St. John’s and Fort McMurray, Alta.
“It’s slow,” said Bob Butler, a cab driver for 20 years whose car was among a long line of taxis close to the popular bar-filled George Street. “People are not moving.”
Darren Calabrese for The Globe and Mail
The condo market is also easing. Condos used to get snapped up as soon as they went up for sale, but many have been sitting on the market for months, including one replete with a wine cellar.
One strip of dilapidated buildings was supposed to become a cluster of high-end condos. But one of the structures is now slated to become an apartment building and another is a parking lot.
Throughout the city there are indications that construction has slowed: An empty hole that was destined to be a condo; a person taking down a sign for a gleaming building that was never built.
Although house sales are up year over year, there is uncertainty in the air as Newfoundlanders and Labradorians wait for the province to unveil its budget.
“People are holding off right now because of potential layoffs with the government,” said Larry Hann, a real estate agent with Hann Group, which specializes in condos and houses. Mr. Hann is optimistic for the future because of the huge offshore oil finds, but said: “In a couple of years time, unless we get another major oil project, there is going to be a lot of inventory sitting around empty.”
Commercial real estate vacancy rates rose to 7.7 per cent last year from 4.8 per cent in the previous year, according to Turner Drake & Partners Ltd., an Atlantic Canada real estate consultancy.
Seventeen new office buildings were erected and expanded over the past few years, including the addition of two shiny office towers in the downtown core the same year oil started to tank.
“There was an increase in supply at the exact same time when the initial sense of a decrease in demand was occurring,” said Charlie Oliver, a commercial real estate veteran of 35 years with Martek Morgan Finch Inc.
Still, Mr. Oliver said he is not seeing a lot of vacant space because many of the big oil companies are locked into their leases for another year.
“The biggest challenge is going to be in the large blocks of space which will be coming onto the market this time next year,” Mr. Oliver said. “We are still at the stage of uncertainty rather than reality of what is going to be vacant.”
A hit to provincial finances
The recently elected provincial Liberal government is now scrambling to meet the dual challenge of stimulating the economy and reducing the deficit.
Credit-rating agencies have downgraded Newfoundland and Labrador’s debt and changed their outlook from “stable” to “negative,” which could eventually drive up borrowing costs at a time when the province has little spare cash.
The credit agencies won’t upgrade their ratings until the province improves its finances. “It is one thing to say that you are willing to or looking at making changes and another to actually implement the changes,” said Michael Yake, senior credit analyst with Moody’s Investors Service.
The deficit is on track to balloon to $2.4-billion next year and will remain close to $2-billion annually for years if trends hold.
About one-third of the province’s revenue has traditionally come from oil royalties. That amount dropped to $551.8-million from $1.2-billion when the province updated its budget for fiscal 2015-16, due to weak crude prices and declining production from mature oil fields such as Hibernia.
Finance Minister Cathy Bennett knows she doesn’t have much time. She has spoken to the province’s major lenders and bond agencies and said she has heard their message.
“It is not an option for us to take two years to get to a credible plan,” Ms. Bennett said in an interview in St. John’s. “We have been very clear with the people of the province and with the bond-rating agencies that we intend to introduce a very credible plan as part of our budget.”
The Liberals campaigned on the promise not to cut public sector jobs or raise the HST, which at 13 per cent is among the lowest in the Atlantic provinces.
But since coming into power in December, the government has changed its tune. Now a tax hike and job cuts are expected. The provincial government has directed its staff to find ways to reduce expenditures by a third, a worrying scenario for teachers, civil servants and other public sector workers.
“There’s no way to avoid people losing their jobs,” said Jerry Earle, the president of NAPE, the province’s largest public sector union whose members include social workers and highway maintenance workers.
Newfoundland’s public sector comprises a quarter of the province’s work force, higher than the national average of 20 per cent. The bulk of the 60,000 jobs are in hospitals, health care and social assistance, while the rest are in schools and the government.
Like Alberta, Newfoundland and Labrador will receive a cash infusion of $30-million from an emergency federal program designed to help provinces during sharp economic downturns.
As for the more contentious “equalization” payment, the province said it will not be receiving those subsidies any time soon because of a lag in the way the payments are calculated and administered.
“It is worth a reminder that Newfoundland and Labrador does not receive equalization payments now,” the province’s Premier Dwight Ball said in an interview in St. John’s.
The other Atlantic provinces, New Brunswick, Nova Scotia and Prince Edward Island, along with Ontario and Quebec, are still in “have-not” status, due to the calculation lag. But because the formula for payments has already been set for the next few years, Newfoundland and Labrador will not qualify.
“Of course we would like to see the formula changed so we can use that money to provide those benefits,” Mr. Ball said. “But the future for Newfoundland and Labrador as we work our way out of this is not going to be receiving equalization cheques from Ottawa.”
Darren Calabrese for The Globe and Mail
Exacerbating the situation is the province’s vast land, sparse population and rapidly aging demographics.
There is a fear that the fiscal mess will lead to another exodus, similar to what happened when Ottawa closed the province’s cod fisheries in 1992.
That year marked the province’s peak population with 580,000 people. But the cod moratorium decimated fishing communities and Newfoundlanders fled to other parts of Canada looking for work.
Most never returned and today the population is 527,000, with more than a quarter over the age of 60.
In Burgeo, one of Newfoundland’s many remote and tiny communities, two-thirds of the population is over the age of 55.
It is common here for residents to drive 10 hours for a 15-minute doctor’s appointment in the capital. During winter months, the only road to Burgeo can be closed because of white-out conditions.
Burgeo’s mayor is worried about the looming cuts. “Smaller communities require a bit of extra to provide services. Many times they are looked to to provide the cuts,” said Barbara Barter, who volunteers as the mayor and used to work as a full-time teacher.
And as services disappear, people leave.
Sharlene Hinz, who runs Aunt Edna’s Boarding House B&B on Little Bay Island, is considering selling her bed and breakfast after the designated ferry to her island was cancelled.
About 100 people – tourists included – live there during the short summer. Located off the northern coast of Newfoundland, Little Bay used to be one of the province’s fishing communities. But its crab processing plant, which was the island’s main employer, closed about five years ago. Then its only store disappeared along with its direct ferry. Without regular access, it now takes residents a full day to go grocery shopping.
“I don’t think the small communities should be closed. At the same time, without young people, that is what’s going to happen. Everyone dies,” Ms. Hinz, 62, said over the phone from Vancouver Island where she lives off season.
There are two students and a teacher on the island of mostly senior citizens.
Big projects wind down
Although St. John’s has a jobless rate of 7.6 per cent, the provincewide rate is 14.1 per cent, up from 12.3 per cent mid-2014. And the rate could go higher as major construction projects begin to wind down.
Construction at Hebron and Muskrat Falls will be wrapping up over the next two years, which will lead to even more job losses. Hebron employed 5,300 at the height of construction and will need a fraction of that work force to operate the rig once it is in production in 2017. Vale hired as many as 6,000 people to build its nickel plant and now requires only 750 workers to operate it. Muskrat Falls employed about 5,000 at its peak and by the time it starts producing electricity in 2018, will only need about 70 people to run the equipment.
About $30-billion will have been invested in the province to erect Hebron, the nickel plant and Muskrat Falls. The bulk of the funding for the electricity project was by taxpayers and it is unknown whether it will be profitable.
“It’s certainly a transformative project for the electricity market and important contributor to the Newfoundland economy,” said Finn Poschmann, chief executive officer with the Atlantic Provinces Economic Council. “The probability of it being a profitable investment in the medium term for the province is dicey.”
The province is waiting to see how the federal government allocates $125-billion in infrastructure spending in its budget on Tuesday, half of which was a campaign promise to help bolster Canada’s sluggish economy.
The Premier is hoping Ottawa will be flexible on how and where the money is spent. “It is important that we have infrastructure projects ready to keep our work force working,” Mr. Ball said.
The government and business community talk about diversifying the province’s economy. They see many opportunities in agriculture, aquaculture, mining, forestry and technology, although they still envisage the province as a destination for oil companies.
Darren Calabrese for The Globe and Mail
Tanks belonging to Irving Oil dot the picturesque landscape of St. John’s and the offshore supply ships sit in the city’s harbour, a constant reminder of the province’s dependency on crude.
The government and its residents are hoping for another big project. Statoil ASA, the Norwegian oil giant, and other big oil producers recently paid $1.2-billion to explore for oil in the Flemish Pass basin, which contains at least 12 billion barrels of oil and dwarfs the province’s producing basin Jeanne d’Arc. Statoil recently found Bay du Nord, hailed as one of the biggest deep-water oil discoveries in decades
However, a Bay du Nord project is far from a done deal. No one knows how long it will take to delineate the resource or how long it will take for oil prices to recover to a level where it makes sense to develop the Flemish Pass.
“Yes we are in a little bit of doldrums that no one anticipated. Maybe in some ways, it is an opportunity to reshape our economy,” said St. John’s Mayor Dennis O’Keefe. But he added: “The future of Newfoundland and Labrador is very, very bright. Ultimately we will be the energy powerhouse of North America.”