That's the deadline set by the companies and the Government of Newfoundland and Labrador to reach agreement on provincial benefits.
The offshore supply and service sector in Newfoundland and Labrador is likely nervous about the outcome even if there is little public comment from individual companies or from its industry association, NOIA. The sector is nervous because in the absence of a Hebron development agreement, the local industry will continue to shrink. The White Rose project is completed and the two rigs forecast to do exploration drilling in the Orphan Basin this summer won't replace the work from development of Hebron.
Shelving Hebron will also cost the Government of Newfoundland and Labrador as well. Economist Wade Locke correctly pointed out the implications in a recent radio interview with CBC:
Well, what you want to be careful of is in the next five years there will be substantial revenue from the oil and gas sector. And unless we have new fields developed after five years we'll see a substantial decline in production offshore. ...Locke's projections are based on the provincial government's own figures and take into account the possibility that the two major fields, Hibernia and Terra Nova are close to exhausting proven1 reserves. In all likelihood, accounting for probable reserves and possible reserves, there is considerable life in Hibernia2 and Terra Nova, however by most reasonable estimates, in the years immediately after 2011, offshore oil production will drop significantly from peak levels.
But I think the point the point would make that yes there is a substantial amount of money coming to the provincial as a result of the enhanced royalties and corporate income tax available to the government because of the additional revenue from oil. However, if there'’s no new fields developed after White Rose, we know that by the time 2011 comes around for example, which is 5 years from now, depending what happens with Hibernia of course, we could be at one third or one half the current level of production we currently have. ...
Premier Danny Williams' recent comments about seeking an equity position for the provincial government in Hebron and of having the Hebron development include construction of a new oil refinery in the province haven't calmed the local concern that Hebron development might not proceed. Hebron is already an expensive project to develop with its heavy oil and fractured field. Recent high oil prices make Hebron viable under the existing provincial government royalty regime and with the companies already proposing a small gravity based structure to extract the oil. Only three years ago, the provincial govvernment considered lowering the royalty regime, largely as a result of the relatively low oil prices and the overall costliness of the project. Tacking on new costs - ones not crucial to development of the field itself - could put Hebron back into mothballs.
As noted here previously, Williams is likely just pushing a bargaining position that asks for considerably more than his real bottom line. His previous public stances in negotiations with the federal government on offshore revenues and with companies like Abitibi on Stephenville demonstrate the Premier's apparent penchant for talking tough and settling for considerably less than originally sought.
This cautious optimism is also bolstered by the current development proposal, at least as far as it is known publicly. The Hebron proponents have already met the Premier's initial demands for more local benefits with the commitment to a gravity-based structure. The Premier noted several weeks ago that the proponent's most recent offer to government included improved government royalties, likely as a result of retreating from their initial position that they needed royalty concessions. The Premier likes to keep upping the "ask" as he calls it, but at some point, he has shown that he knows when there is no point in further "asks".
Over 25 years after the Hibernia discovery, the Newfoundland and Labrador offshore remains a frontier region. Drilling costs are high - as much as $75-$100 million per well drilled - and only four major fields have been discovered. Exploration tailed off after 1990 and despite some efforts by the provincial government, it was only surging international oil prices that have prompted renewed interest in the high risk/high cost frontier and its still considerable potential both for oil discoveries and for production of offshore gas.
No Hebron wouldn't help overcome the lack of oil and gas infrastructure in the region -such as having rigs readily available - that would mark the tipping point from frontier - and sporadic activity - to a thriving energy-producing region. Local companies have suffered through the start/stop, boom/bust nature of offshore development since the Hibernia agreement was signed in 1990. Many have shifted to doing work in other parts of the world, but the preference in the local industry has typically been a steady local book of business that serves as a base from which to build.
Part of marking that transition away from being an oil and gas frontier would be renewed effort by both the provincial and federal governments to reducing the costs of exploration. Much has been done, including reducing the project approval process to internationally competitive 12 moths. Other work needs to be done. Some ideas, both technical and environmental requirements and taxation on exploration, could enhance the attractiveness of Newfoundland and Labrador to international oil companies.
As it stands right now, smaller fields than the local offshore are attracting the sort of attention that could and should be coming here. Platts reported on Friday, for example, that "Shell, ExxonMobil and ChevronTexaco, will bid for a license to extract oil and gas offshore the Black Sea....[The] Ukraine's explored reserves of natural gas are estimated at about 1 trillion cu[ubic] m[etres], while undiscovered reserves could be as high as 5 trillion cu[bic] m[etres] of gas."
To put that in perspective, proven gas reserves offshore Newfoundland and Labrador are more than 9.0 trillion cubic feet with more than 2.0 trillion cubic feet available for development off Labrador alone. The local reserves may be smaller than those in the Ukraine, but there is potential for more. The reserves that exist can be put into production supplying the North American market where demand is strong but supply is limited in the short-term.
As a last part of that transition away from a frontier region, a successful Hebron agreement would signal a local political climate that actually welcomes foreign capital to develop local resources. If, for some reason, the Premier's escalating rhetoric on Hebron hardens into government's bottom line, investors will look elsewhere where costs may be high but the risks and rewards are greater.
In that context, a successful development agreement for Hebron would mean much more for Newfoundland and Labrador than the demands Premier Williams has made publicly.
There's every reason to believe Premier Williams understands the medium- and long-term implications of not having a Hebron agreement.
But in the days and weeks remaining until the self-imposed deadline for a deal, that doesn't stop many interested in the local oil and gas industry from wondering if they are looking at the beginning of exciting new times or the continued underdevelopment of the offshore oil and gas industry.
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1. Proven reserves are those confirmed to be in place based on production, delineation and geological surveys. Proven and probable are a combination of those established and those most likely to exist. Prove, probable and possible reserves includes potential reserves that must be confirmed by further delineation of fields.
2. Approximately 300 million barrels of oil have been identified at South Hibernia. While the provincial government has publicly discussed the prospect this field would be considered a new project requiring separate development agreement, in all likelihood, Hibernia South will be developed under the existing Hibernia agreement, with wells being tied back by pipeline to the existing Hibernia gravity based structure.
