Quebec’s equity move: An option for the Ring of Fire?

Posted on February 17, 2014

0

The Quebec government has stunned the natural resource sector with an announcement that it will trade public funding for a big equity stake in oil and gas development in the Gulf of St. Lawrence.

It’s an interesting move, and Ontario’s provincial leaders should take notice.

In a Thursday announcement, the PQ government said it was striking two separate equity deals with all the companies that hold exploration permits on Anticosti Island, in exchange for funding their drilling programs.

The first of the deals will see Quebec contribute $70 million for a $100-million drilling programundertaken with two Canadian-based juniors, Pétrolia Inc. and Corridor Resources, who will throw in their exploration licences, and the French firm Maurel & Prom, which will invest up to $43 million in the program. The province will hold a 35-per-cent stake, while the others split the rest.

A second deal contemplates a $45-million government investment in a $90-million program undertaken with Quebec-based junior Junex, which will transfer its land rights into the joint venture for a 20 per-cent-stake. Another partner would be brought in to complete the set.

As Junex described it, the two-phase exploration program will be financed by Ressources Quebec and “a third party industry player who remains to be identified and who will be at arm’s length,” in return for an 80-per-cent stake in “a special purpose vehicle created for the project which will control 100 per cent of Junex’s Anticosti Island permits.”

So the move comes with a hefty price tag. But, according to the government, the yet-unproven Anticosti development could represent a $45-billion boon to the province over the next 30 years, in the form of royalties, taxes and return on equity. If the play comes through, it could also help reduce the province’s reliance on foreign oil.

The announcement has sparked a lively debate and renewed interest in Quebec as an investment destination.

There are critics, of course. Some oppose the move on environmental grounds. Others decry government encroachment into “private sector” activities. In their view, giving up land rights is too high a price to pay for government funding. Still others sneer, on principle, at the misbegotten ambitions of politicians.

But the Financial Post’s Nicolas Van Praet saw advantages for the junior companies, given the wretched state of public markets and the unproven status of the field. He also cited an intangible benefit that may flow from government participation.

“Giving Quebec an inside seat in development also adds a formidable partner to the public acceptance equation,” he wrote. “All the drilling work done will be shepherded by government officials with the natural resources and environment departments. In a province in which people are increasingly skeptical of private enterprise, it’s easier for the premier, rather than a business executive, to make the argument that oil development must move forward.”

That’s a clever insight on a bold provincial move.

Commentators in the Rest of Canada delight in castigating Quebec for its profligate ways and socialist mindset, but they tend to overlook the ground-breaking actions taken by the province in past decades.

Such as Plan Nord, which generated far more investor buzz than the similar, but commitment-free, Growth Plan for Northern Ontario. Or the Paix des Brave Agreement with northern Cree, which has left other provinces in the dust, flailing from failure to failure in their efforts to hammer out revenue-sharing deals. Or the massive James Bay hydroelectric project that gave rise to electricity security and a new era in Aboriginal relations. It is a wonder that any Canadian government, in this age of conversation and consensus, could successfully execute such a grand vision.

Now this oil and gas equity deal.

Yes, there is risk associated with the move. Risk of losing public money. Risk of looking bad. Risk of provoking backlash from environmental organizations. Risk of being castigated by ROC commentators for profligate ways and a socialist mindset.

But there is also the promise of significant profit that could benefit the province well into the future.

Are there any lessons here for those who would develop Ontario’s far northern Ring of Fire mineral zone?

Perhaps. It’s at least worth a look-see from leaders of Ontario’s provincial parties.