NFLD Government Approves Deal - Hebron Oilfield

[Disgruntled70sHab]

Nfld govt approves deal to develop Hebron oilfield

2007-08-22 11:19:00

ST. JOHN'S, N.L. (CP) - The Newfoundland and Labrador government, on the eve of the provincial election campaign, has officially approved a tentative deal to develop the multibillion-dollar Hebron offshore oil project, a venture that could prove to be the province's most lucrative oilfield.

Premier Danny Williams, speaking at a news conference in St. John's, confirmed the province will invest $110 million to secure a 4.9 per cent equity stake in the project - a first for the province.

"We all know the road to this day has not been an easy one," Williams said.

"However, I think we can all agree today that it has been well worth the wait. There has been many critics and naysayers, especially from outside our own province, and I would say to those people today to never underestimate the strength of Newfoundlanders and Labradorians"

The dramatic news came more than a year after the project partners shelved their plan amid complaints that Williams was asking for too much from the consortium.

Chevron Canada Ltd., the project operator, disbanded its team in April 2006 after Williams insisted on the 4.9 per cent equity stake.

Relations between the premier and oil sector soured until June of this year, when Williams announced exploratory talks were ongoing with Hebron's partners, including Petro-Canada (TSX:PCA).

"We look forward to an era of consultation and partnership and co-operation with our oil industry partners," Williams said Wednesday.

"Our province is open for business, and we are confident that there are many great things to come in our oil and gas industry."

The new memorandum of understanding comes as Williams prepares for a provincial election, the fixed date for which is Oct. 9.

Williams's battle with the industry, which he derisively dubbed "big oil," won him widespread support in Newfoundland and Labrador, propelling his popularity into the stratosphere.

To be sure, the Hebron deal will cement his reputation as a champion for the province, fuelling speculation of a provincewide sweep for his ruling Conservatives in the fall vote.

ExxonMobil Canada is the largest equity holder in Hebron with a 38 per cent stake. Chevron holds a 28 per cent stake, along with Petro-Canada at 24 per cent and Norsk Hydro Canada Oil and Gas Inc. at 10 per cent.

Hebron, located about 350 kilometres southeast of St. John's in the Jeanne d'Arc basin, could be more valuable than Newfoundland's three current offshore oil operations combined, according to some estimates.

The project will include construction of a so-called gravity-based structure, an enormous production platform that sits on the ocean floor.

Newfoundland's first offshore oil production platform, the massive Hibernia rig, is a similar design.

A study by Memorial University economist Wade Locke suggests the Hebron could add $8.1 billion to the province's coffers until 2035.

"This, in conjunction with some other things likely to happen in the economy, will keep up being a 'have' province for a long time," he said in an interview Wednesday.

Locke has found the oil industry's contribution to Newfoundland's treasury is expected to peak at $1.7 billion in 2011 before sharply dropping off. Hebron, estimated to contain 731 million barrels of recoverable oil, would offset that decline.

Previous reports have suggested it will cost $5 billion to develop Hebron, and an additional $4 to $6 billion to develop over 25 years.

Some industry experts have cautioned that the oilfield's high sulphur content will make it costly to develop. But Williams has maintained that Hebron is a highly attractive project that the oil sector is keen on developing.

He has suggested high oil prices and a proposed provincial energy plan that's expected to contain a higher equity demand.

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[Skilly]

The mantra in Newfoundland for the past 5 years has been "No more giveaways". If you want to develop a resource in this province then you'd better be willing to share the wealth with the province and not just offer jobs.

I heard on the news last night that the government of Newfoundland could make as much as $16 billion dollars off this development (and the government of Canada will make about $7 billion).

Even without "Steve's" broken equalization promise we will be a have province, which was our arguement with him all along. This development will help us get on our feet economically - but no resource clawback (like Alberta had when developing the tarsands) would have been much nicer. Too bad you can't trust the man to keep his word though.

Initial estimates have building a subsea powerline from Labrador to Nova Scotia (or US) at $5 billion (I believe). Looks like that is a feasible project now. Quebec will eventually see that NL is serious about bypassing them if they don't negotiate fairly and within the next decade I am sure they will come to the table. (The contract is over in 2041)

[franko]

Here's my question, Skilly . . . and I honestly want your clarification.

If Newfoundland has this newfoundcash and is going to be a "have" province (to the tune of billions), why does Mr. Williams still demand subsidy in the form of equalization payments?

[Skilly]

franko said:

Here's my question, Skilly . . . and I honestly want your clarification.

If Newfoundland has this newfoundcash and is going to be a "have" province (to the tune of billions), why does Mr. Williams still demand subsidy in the form of equalization payments?

He isn't.

The Atlantic Accord and Equalization are two entirely different entities. Harper tied them together with his budget.

The Atlantic Accord (signed in 1984) stated that Newfoundland would be the sole beneficiary of the oil profits. We never were. The government of Canada was getting rich off the Accord (you know all those surpluses we have had in the last 10 yrs) and Newfoundland was paying offset payments back to Canada that were more than what we were making because the equalization formula was unfair to a province with high unemployment and low population.

The the Liberals gave NL that 2 billion dollars (for past wrongs), because to give the amount we lost in the previous 20 yrs was undoable. So we accepted 2 billion, with the caveat that the government would sign over there 8% share in the project to NL, like the 1984 Accord meant to do. That still hasn't happened, and was one of the main reasons Williams wanted an equity share in Hebron.

The Harper made us a promise. Natural resources would be excluded from equalization. He didn't say "we will let you keep the accord". That was signed, sealed and delivered. But in his latest budget he in effect told NL that you can only keep the accord if you do not sign on to the new equalization formula. The new equalization formula would give MILLIONS of dollars LESS to NL. Remember he said no province would be ADVERSELY affected by the new equalization? Well two were - Sask (to a small degree) and NL (to a HUGE degree). In effect he said keep your accord but you are not getting any new equalization money .... so it is Canada's way of taking the accord money back from us. In 10 yrs under this new system Newfoundland will lose out on billions in equalization , geezz that is an awful coincidence ... we get 2 billion for past wrongs, then we aren't entitled to new money because we got the accord.

The two were always seperate and distinct. Haprer tied them together. We always said that when we are a "have" province we have no problem being a contributor to the equalization system. But promises are promises. And he broke TWO to our province.

Everyone sees this as a per capita debate when compared to Ontario. When will NL ever be richer than Ontario? Come on .. we have the highest unemployment, the lowest wages, the highest health care costs, the highest debt .... to compare 500,000 people spread out over a region like NL to 14 million in Ontario is assinine. It is obvious that Ontario will always be richer no matter how much money Newfoundland gets ...

Then McGuinty comes out at the last premier's meeting looking for handouts from ROC and what us to sign on to the Los Angeles carbon credits system .... forget it pal, figure out your own problem like you tell the rest of us. Boo hoo the high dollar hurts the auto makers .... imagine how it is affecting us who have to imprt everything.

It is a complicated arguement that I can't do justice to ... let's just say that if he lies to us, he will lie to you (unless you live in Ontario, Alberta or Quebec)

[Disgruntled70sHab]

Thanks for that, Skilly. This actually explains the whole situation quite well.

Cheers.

[franko]

Just playing devil’s advocate here . . . what about

Attaboy, Danny. You sure showed them, all those big oil companies and their white-shoe lawyers, those homegrown naysayers and the pundits in the national media. Good for you, I say -- at last, here's a premier with the guts to stand up to those cardsharps from the mainland trying to pull a fast one on the province, as they did so often in the past. No more bad deals. No, sir.

But don't take my word for it. Here's one observer who says this Hebron oil deal you've negotiated is a "tremendous agreement" offering "unprecedented benefits" to Newfoundland and Labrador, that the province is taking "real and meaningful ownership" in the project and that it's all thanks to your "determination and strength of conviction." Oh wait, that was you, at your press conference -- but still, you've got a right to crow, haven't you?

Haven't you forced the oil companies to give you a 4.9% ownership stake, when they swore up and down they never would -- to the point of walking away from the whole deal 16 months ago? True, you've agreed to pay them $110-million for it, which is $10-million more than you were offering before. And true, as you've admitted, you've lowered your demand for a new "super-royalty" on revenues from 7% to 6.5%. And true, you've lost 16 months to the dispute, meaning the revenues from the project start flowing that much later. But still, what a triumph!

Mind you, you might have mentioned another, rather important concession: namely, that the basic royalty the province charges in the early years of an offshore oil project, instead of rising from 1% of gross revenues to 7.5% at the point where all costs are paid out, as had been standard until now, has been frozen at just 1%. The province only gets the extra 6.5% if oil prices stay above US$50 a barrel.

What is the cost of this last concession? Your Natural Resources Minister won't tell us: "We're staying away at this point in time from going to assign value to it," she told the Canadian Press. But hey, if it's good enough for you, it's good enough for me. In the same way, I can see why there's no need to make public the text of the deal (actually, it's just a memorandum of understanding -- the precise terms are still to be negotiated), or to bring it before the provincial legislature for ratification. After all, as you so well put it, if you did "[the opposition] would probably carry the government in on their shoulders and pass it with a blink." Why subject them to that degree of humiliation?

But here's another thing that bothers me, Danny. Leave aside how much you've given up in royalties to get that ownership stake. Why make such a trade at all? After all, the royalties in question are paid on gross revenues -- whereas ownership in the project entitles you, not just to a share of revenues, but a share of the costs. These have already climbed, from an estimated $6-billion to ... well, no one seems to have a very clear idea what it will cost at this point.

But let's say it's closer to $10-billion, all told. That 4.9% equity stake lets you -- or rather the taxpayers -- in for another $500-million in costs, against about $2.5-billion in revenues, if oil stays at US$70 a barrel, or $1.5-billion at $50. So your share of the profits, over the life of the project, are between $1-billion and $2-billion. If the same money could be collected, at considerably less risk, in the form of royalties, why the fixation on public ownership?

I know: it's to give the province "a window" on the industry. But at 4.9%, the province would have precious little say in the operation. And it's hard to see what sort of leverage it would have, as a shareholder, that it would not have as a regulator, or what information it would not be able to obtain from regulatory filings, legislative hearings and private talks. Indeed, there's something bizarre about the government paying for the right to participate in the extraction of a resource it already owns.

And as for those "unprecedented benefits," presumably you mean the companies' assent to use a gravity-based structure as the project's platform, at much greater expense in time and manpower than the vessels used in other offshore projects. But the extra costs associated with building a GBS have to come from somewhere, and since the government of Newfoundland is now a part owner of the project, in part they will come from the government.

Overpaying your suppliers is not usually thought of as the road to riches, but what do I know? You're the one with the business experience. You're the one with the negotiating skills, the moxie, the backbone -- the one man on whom the whole future of Newfoundland depends. You've told us so many times. Andrew Coyne

[Skilly]

Ahhh the good ol national media ... never a good word for Newfoundland. But we are used to it.

franko said:

Mind you, you might have mentioned another, rather important concession: namely, that the basic royalty the province charges in the early years of an offshore oil project, instead of rising from 1% of gross revenues to 7.5% at the point where all costs are paid out, as had been standard until now, has been frozen at just 1%. The province only gets the extra 6.5% if oil prices stay above US$50 a barrel.

Our local media and economists are trying to figure this out too, in terms of whether it will cost us or not. Sounds like a bit of a risk and our Minster of Natural resources basically said it was a "calculated risk".

But let's say it's closer to $10-billion, all told. That 4.9% equity stake lets you -- or rather the taxpayers -- in for another $500-million in costs, against about $2.5-billion in revenues, if oil stays at US$70 a barrel, or $1.5-billion at $50. So your share of the profits, over the life of the project, are between $1-billion and $2-billion. If the same money could be collected, at considerably less risk, in the form of royalties, why the fixation on public ownership?

The problem is no one knows how big Hebron is. Initial estimates say 700 million barrels, which make this guys numbers seem plausible - but he isn't taking into account the secondary forms of revenue either (corporate taxes, jobs, etc).

But the initial estimates of Hibernia were way off. In fact, oil companies always underestimate the size of the find. Last year they were saying Hebron contained 317 million barrels, this year it is 731 million barrels. When the oil companies negotiated a royalty regime with Newfoundland over Hibernia, the initial estimates had 615 million barrels in Hibernnia, today the size of Hibernia is 1.244 billion barrels minimum.

Alot of engineers that I graduated with that work in the oil industry tell me that the oil companies firmly believe that Hebron is bigger than the other three oil fields off Newfoundland (Hibernia, White Rose and Terra Nova) COMBINED.

So if there are say over 2 billion barrels of oil out there, (thats what my friends tell me that the companies truly believe is out there) then Newfoundland stands to gain 15-20 billion dollars. (using $70)

I know: it's to give the province "a window" on the industry. But at 4.9%, the province would have precious little say in the operation. And it's hard to see what sort of leverage it would have, as a shareholder, that it would not have as a regulator, or what information it would not be able to obtain from regulatory filings, legislative hearings and private talks. Indeed, there's something bizarre about the government paying for the right to participate in the extraction of a resource it already owns.

That last line of this paragraph was written word for word today in an editorial in our paper. And I agree with it. On the surface we are paying for something that is already ours. That does suck. But there is another "benefit" of being an owner in this project. It allows us to see the oil companies books with regards to the project. There are no lies as to profits and maybe we will learn how to "doctor" books and hide numbers for things like equalization calculations.

I'd ask the author of this story one thing. Does the government of Canada regret owning a piece of the Hibernia oilfeld?

And as for those "unprecedented benefits," presumably you mean the companies' assent to use a gravity-based structure as the project's platform, at much greater expense in time and manpower than the vessels used in other offshore projects. But the extra costs associated with building a GBS have to come from somewhere, and since the government of Newfoundland is now a part owner of the project, in part they will come from the government.

Not sure I agree with this. Newfoundland has already played a part in building a GBS structure as well as an FPSO ... so its not like we are novices at either, the price tag should be less than Hibernia.