For those of you who missed it - like me - here's a story Moira Baird filed in March 2002 on Hibernia royalties. It describes in general terms the types of royalties that come from projects like Hibernia and Terra Nova and White Rose. I'll give all the detail like page, placement and so forth for those who might want to cite this somewhere other than coming from my blog. Like I said in the other post, Moira is "industrial strength", that is, she gives it to your fair, factual and, in this case, reduced down to the point where even someone like me can actually get it.
Many thanks to Moira and The Telegram for providing this copy. Note: I have changed the paragraph structure slightly from the original. Otherwise, the piece appears as it did in the print original.
Background information is available on Hibernia and Terra Nova and the generic offshore royalty regime from the Government of Newfoundland and Labrador. There is a separate generic regime for onshore production, like the site at Port au Port.
Province's Hibernia royalties continue to trickle in: Terra Nova project holds more promise for Newfoundland coffers
St. John's Telegram
Wednesday, March 6, 2002
Page: A3 / FRONT
Section: News
Byline: Moira Baird
Source: The Telegram
Newfoundland and Labrador won't get rich from its Hibernia royalties -- but they continue to trickle in.
By the end of March, the province's annual royalties from its largest offshore oilfield are expected to total $29 million for the fiscal year. Since Nov. 17, 1997, when Hibernia started producing oil, until March 31, 2002, the province's royalty share is expected to total $65 million."
The province receives monthly cheques from Hibernia," said Darryl Mercer, spokesman for the Department of Mines and energy. First oil flowed from Terra Nova Jan. 20, and the royalty cheques from that project are expected soon. By comparison, last year's production at Hibernia was worth substantially more than the province's royalty cheques.
Using Petro-Canada's average price of $36.63 Cdn per barrel, as noted in the company's 2001 annual report, Hibernia oil was worth about $1.9 billion last year. Monitoring and auditing offshore oil royalties is a complicated business. The job falls to the petroleum projects monitoring division, part of the Department of Mines and Energy.
TWO TYPES
There are two types of royalties for Hibernia -- one is the basic royalty rate, the other is the net royalty rate.
The basic royalty rate is determined by the price of a barrel of oil, the level of production, and the cost of transporting that oil to market. (That cost includes shipping the oil from the Hibernia platform to the transshipment facility at Whiffen Head, Placentia Bay in tanker shuttles.) The basic royalty started at one per cent and goes to a maximum of five per cent.
Right now, Hibernia is paying at three per cent. The net royalty of 30 per cent doesn't kick in until "payout" has occurred. That means all the costs, plus interest, incurred by the Hibernia consortium to produce oil must be paid off before the province receives any net royalties.
Those costs submitted by the Hibernia partners are regularly audited by the province's petroleum projects monitoring division. When the Hibernia consortium asked for permission to increase production to 180,000 barrels a day, the province, in turn, asked for a speeded-up timetable for the basic royalty rates. A deal was worked out by July 2000.
Previously, that basic royalty regime increased by a percentage point every 18 months until reaching a maximum of five per cent. These days, the province gets a royalty increase every 18 months, or every time Hibernia reaches specified production levels -- whichever comes first. That rate now stands at three per cent. It will reach four per cent when Hibernia produces 194 million barrels of oil, and will top out at five per cent in February 2004 or when production hits 268 million barrels.
But those royalties can also fluctuate with the price of oil. That's thanks to an "index factor," which reduces the royalty rate as the price of oil decreases from one month to the next. If crude oil prices fall below $30 per barrel in 1997 American dollars, the royalty rate is reduced during the repayment of $1.2 billion in loans that were guaranteed by the federal government.
The index came into effect last year, and will last for eight years. (To get Hibernia off the ground, Ottawa also invested $1 billion in the project.)
ONE EXAMPLE
For example, if the price of oil drops to $15 US per barrel in 1997 U.S. dollars, then a two per cent royalty rate would decrease to one per cent for a month.
Each month, the federal government calculates this index for both the province and the oil companies. Although Terra Nova is a smaller oilfield than Hibernia, it will produce more generous basic royalties for the province. Those royalties start at one per cent and reach a maximum of 10 per cent based on the level of production. Unlike Hibernia, Terra Nova has no index factor that will reduce the monthly basic royalties.
And also unlike Hibernia, there is no "payout" of pre-production costs to the oil companies that will eat into future net royalties of 30 per cent. The more profitable the Terra Nova oilfield is, the more net royalties the province will receive. Any future offshore oil projects, such as White Rose, will use a generic royalty regime and the province is still designing a competitive natural gas royalty.
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