There is plenty of rejoicing at the news today from the Hebron consortium that the partners are closer to filing a development application. They have an agreement among themselves on a bunch of things.
There are a few more steps to go and, as David Cochrane reported on CBC Radio this afternoon it could be 2012 before we see first oil. Next we should see a development application (if I understand correctly) which will include local benefits proposals, a development mode and all the things necessary to start hearings.
The Premier is suitably excited, although he cautioned the proponents, led by Chevron Canada, that the province will expect improved benefits over previous developments. He singled out royalties, local construction and supply and secondary processing (read refining).
Ok. We'll let's just take a step back and look at some issues that will affect the outcomes.
First let's see what overall circumstances affect the context of these upcoming talks.
1. The provincial energy minister has control over approval since the security of supply provisions of the Real Atlantic Accord are satisfied. You can find the Real Accord along with a ton of other useful information on the regulatory process at the Canada-Newfoundland Offshore Petroleum Board website.
2. High oil prices forecasted to last well into the future make this a viable project with less of the fear of it being "marginal" like Hibernia was considered to be. There won't be any demand for government loans and loan guarantees.
3. The provincial government has bags of cash and no fear of sudden financial ruin. As a consequence, there is much less pressure to sign a good deal when something slightly better might be attainable. The Premier can slag Grimes for trying to entice the Hebron consortium a few years ago, but he should be fair in his comments. He has a distressing tendency to play a game of "neener-neener-neener" with public policy issues. Danny Williams has benefited from improved overall circumstances, not necessarily his superlative management skills, his spin machine to the contrary.
Put the two situations in context; make a fair comment. Personally, I learned a long time ago to walk a mile in someone else's shoes or face a genuinely tough situation before I start to pat myself on the back. There are times when Danny Williams' comments sound a lot like: "There'll be no more of this sun going down thing in the daytime while I am here. I won't be repeating the same sunshine mistakes of that guy who was here on the night shift, giving away our precious solar resource and settling for too much blackness."
4. In Hibernia, the province pushed the expensive GBS platform on the companies, driving up costs on an expensive project. That led directly to decreased government revenues in the long-term as companies sought offsets.
5. In this case, the proponents are already favouring a smaller GBS. They can't build that anywhere - the closer to the site the better - therefore the companies themselves have automatically boosted local industrial benefits as part of their start-up calculations. The government doesn't have to say a word to automatically start out with greater benefits than previous projects.
Expect to see the GBS built at Marystown where the private-sector yard is efficient. Bull Arm might get the work but here's hoping the companies resist working with a Crown-owned entity. Better for government to dispose of Bull Arm to the private sector, otherwise, the companies are likely to drive some hard - and I mean hard - bargains to guarantee quality of work, low costs and firm timeline guarantees.
6. Note that the Hebron GBS is preferred because of the conditions of the field involved. Comparing Hebron to Terra Nova or White Rose is a foolish, specious comparison. Danny Williams can claim that previous governments didn't ask for enough but the truth is something different.
7. In the broader context, look cautiously at what the province may be cooking up in its idea of a new Crown-owned energy mega-corporation or Crown-owned oil company.
8. Background and technical stuff: If you flip back to the archives there are some posts with links to some background information on the offshore and other oil issues.
- The US government Annual Energy Outlook 2005, with forecast to 2025 covers every source of energy on which the US depends. Here's the link.
- Here's an assessment of the value of the Hebron field from Chevron Canada analyst Deborah Provais.
- If you want to understand what API is and the implications, try this link. Go here before you read the Chevron assessment to get a full appreciation of what the oil look like in the Hebron field.
Second, let's look at the Premier's comments on enhanced local benefits. Premier Williams singled out three ways to increase benefits and basically the first two are the ways one would normally expect to see benefits flowing.
Royalties: By negotiating a special royalties deal, the Premier would be throwing away the generic royalty regime which is actually competitive in the marketplace and produces significant cash benefits for the province. Terra Nova is paying off early and moving to higher levels of benefits under the existing regime. Expect White Rose to do the same, much to the benefit of the province.
Incidentally, the only deal that is really less lucrative for the province as a whole than was expected is the Peckford Hibernia deal. Note that all the people whining are the people responsible for that mess; all the people blaming the Liberals for lousy deals on Terra Nova and White Rose are people like Brian Peckford. Let's just say they have an interest in deflecting attention away from their progeny.
In turn , they will point out that Hibernia was signed by the Wells government, but I am here to tell you it was largely done by the time Wells came along. Peckford had already forced the GBS on the proponents and bargained away the royalties.
Turning back to the current situation, there is a possibility of enhancing the royalty regime. But, and this is a big but, putting royalties in play allows for a Peckford-style trade off of cash for jobs. Keep your eye on that ball to see what actually happens.
Local Supplier Benefits/Construction: Watch for a few things here.
As noted, we are likely to get increased industrial benefits in the province due to GBS construction before Danny Williams lifts a finger. We might lose some cash along the way if Bull Arm becomes the construction site and we fail to meet cost, performance and quality targets through the Crown-owned site. There are a bunch of factors that will impact on the final contract. Let's take this deal (or lack of a deal) on its merits, based on facts.
Look for NOIA, the local supplier association, to start pushing for the Premier to insist that local companies get first look at supply work based on geography moreso than competitiveness. They have pushed for this approach on the past two projects and gotten nowhere fast.
In the offshore revenue struggle, NOIA gave Ottawa the finger and fawned over the Premier in the hopes of achieving some unspecified goal. Danny Williams owes them something or I am sure they feel he does. If he spurns their advances, NOIA will be "oh" for three on boosting local participation in the industry through government policy.
Personally I think NOIA does its members a bit of a disservice when it comes to government relations, but hey, I don't pay NOIA membership dues.
Paging John Shaheen! The Peckfordites long dreamt of a massive petrochemical industry here, turning Newfoundland and Labrador into a cross between the Persian Gulf and Alberta. It was more like a grander version of Come by Chance but fortunately for taxpayers pockets, reality was indeed another concept.
Not too surprising therefore that the Tory's last Blue Book resurrected every old hope of an oil refinery on the site of every old fish plant.
Here's where things could get really curious.
Heavy crude, like the stuff coming from Hebron, requires some expensive and complex refining unless you want to produce something really simple like asphalt. In the current marketplace and in the near-term, we can expect to see increasing pressure to maximize the refining of even heavy crude so that it produces as much petrol and other "light" products as possible.
Refining capacity is growing again, after many years of sluggishness and a surplus capacity in the 1980s. The most rapid growth is in Asia according to US government forecasts, while in the US, where the largest capacity exists, emphasis is on increasing capacity at existing operations and making them much more efficient.
There is a shortage of heavy crude refining capacity. The Saudis have the oil. The problem is there is such a shortage of capacity that the Saudis have actually had to sell the grades of heavy crude at deep discounts in recent months. There is plenty of oil and a sluggishness in the development of capacity to handle heavy crude.
In general though, there is much international interest in refineries that are located close to major markets. That's a key point here: close to markets. Venezuela's state-owned oil company operated refining capacity in the southern US, the Kuwaitis bought refineries and gas stations across Europe and most recently Russia's major oil company has expanded its refining and distribution systems.
But they did it right at the doorstep of the market. The big reason I would point to is the relatively high cost of refining heavy crude compared to lighter oil like the stuff from Hibernia. Heavy crude is expensive to extract and expensive to refine. It attracts a lower per barrel price as a consequence so it has some unique cost issues. Put the refinery on the North American mainland and it is merely a railcar journey or pipeline trip away from a major market or distribution node.
Building a refining capacity here does not seem to be an economically viable idea on the face of it, that is, without government concessions. While the rest of this enhanced benefits piece profits from significant positive changes in the overall situation, trying to build downstream petroleum processing here seems to be a step backward.
Here's a piece of this entire story that is worth watching extremely closely. Opening up the royalties could look good on the face of it, but in practice it might wind up being a Hibernia style trade off as we subsidize jobs with government revenues.
Yet again.
Look even more closely to see if government actually tries to use Hebron as a springboard for its own energy corporation, or Petro-Newf as I lovingly call it. I am naturally cautious of people who want to use public assets (like my tax-cash) and use it to muscle their way into the bigger private sector plays. It's usually a bad idea. They particularly might look at refining as an oil-related asset Petro-Newf could work on developing .
Basically, it comes down to this:
1. The Hebron announcement today is good news for the province.
2. The provincial government will already see significantly better benefits from a Hebron project than from others due to changed domestic and international circumstances.
3. Keep a close eye on what the provincial government actually does in negotiations versus what it says it will do or is doing.
4. Keep a really watchful eye on Petro-Newf to see if it makes a comeback through Hebron.
