Modelling the economic implications of offshore oil : the case of Hibernia

The development and production of Canadian offshore petroleum deposits raises three key sets of issues of interest to economists. First are questions relating to the impact of royalties and taxes on producer decisions, and hence on the level and efficiency of resource taxation. Other issues concern the impacts on the overall economy during both the construction and production phases. A third set of issues relates to the distribution of powers and resource revenues between federal and provincial governments, including the links between provincial resource revenues and equalization payments. This thesis develops a numerically tractable economic model designed to examine these issues. At the model's core is a one-to-one relationship between development plans and production profiles. This property is exploited in simulating the behaviour of a price-taking, net-present-value-maximizing producer under conditions of certainty. The model is linked with a macroeconometric model of the Canadian economy to study the potential consequences of Hibernia, a petroleum deposit located in the Eastern Canadian offshore region. This deposit was chosen for analysis because its size, location and low costs (relative to current world oil prices) combine to raise all of the issues listed above. In most cases studied, producer responses to government policies result in the dissipation of less than five percent of the deposit's net present value to society. Although cases are identified where these responses have more serious consequences, the resulting dissipation of potential net benefits never exceeds 15 percent. The extension of specific forms of royalty and tax relief to the producer generally reduces the distortionary effects of government policies. The simulated exploitation of Hibernia induces small but sympathetic changes in most macroeconomic variables. The net crowding-out effects on other industries are shown to be relatively small, and to be more prevalent during the construction period. The results suggest that the larger share of the net benefits accruing to governments flows to the provincial treasury under three of the revenue-sharing systems modelled. However, Newfoundland and Labrador would lose a substantial portion of its Hibernia revenues under all of the equalization systems modelled.Arts, Faculty ofVancouver School of EconomicsGraduat