Michael Enachescu, an earth sciences professor at Memorial University in St. John's, said natural gas is the target for the current round of exploration, although oil reserves may also be located.If natural resources minister Kathy Dunderdale was being giddily optimistic about this year's offshore land offer, then Michael Enachescu (quoted by CBC in the paragraphs cited above) likely needs to be placed in restraints and heavily sedated.
"[The] call for bids means that practically next year we'll have the return of oil and gas companies to Labrador for exploration, but drilling might not happen before the end of the decade," Enachescu said.
At this point, land parcels have been offered for sale (opened for exploration bids) and at this point, four of those parcels are around or adjacent to two existing significant gas discoveries.
The first thing to bear in mind is that the Labrador gas is well offshore and sits in an environment subject to icebergs and other forms of sea ice that thus far deterred development. Technological issues coupled with natural gas prices haven't made these Labrador gas fields prime candidates for development
The second thing to bear in mind is that exploration activity anywhere offshore Newfoundland and Labrador is heavily dependent on the financial issues. The province has been struggling to issue a natural gas royalty regime since 1997 and even the current administration has repeatedly slipped back the release date of the final version of it.
If the regime looks like what has been reported - complete with a 10% equity position and other royalty add-ons - it may well be that Newfoundland and Labrador will price itself out of the international competition for exploration dollars.
And that's where people need to recall the third point: on more than a few occasions in the past, companies have expressed interest in offshore parcels only to leave them sitting on the table when bids close.Had Enachescu conducted even the simple comparison illustrated at right, he'd have noticed the historic tendency for more parcels to be offered than are taken up.
Had he factored in the financials, he'd have been even less optimistic. (Of course if Enachescu had looked at the closing date for bids - August 1, 2008 - he'd know it would be impossible to meet his time lines for exploration, but that's really a side issue.)
And, with a fairly simple analysis, there's just no way based on that information that he'd credibly claim that we are about to see exploration for natural gas "practically next year" offshore Labrador.
Incidentally, the land parcels as well as the existing significant discoveries can be seen more easily in the map provided by the Canada-Newfoundland and Labrador Offshore Petroleum Board.
The most he could say is that there has been some interest expressed. By the time bids close, we may see some interest turn into exploration commitments. Even then, successful bidders have nine years to complete their exploration. Add it all up and you may well see very little if any activity on the Labrador shelf for upwards of a decade.
About the only way we might see something earlier is if one or both of two possibilities turns up.
First, we might see action on the Labrador parcels if the gas royalty regime turns out to be less scary that it might first appear. Companies may just gamble that even if it called for a Chavez-like equity stake, the odds of those rules still being in force over a decade from now are slim and none.
Second, and perhaps more likely, the province's Hydro Corporation might wind up being the successful bidder. There have been rumblings for some time that Hydro wants to develop what has been euphemistically called low-hanging development fruit. Hydro is fronting a study of development options for the Labrador fields, a study being funded by the Atlantic Canada Opportunities Agency (ACOA). The cost of the exploration parcels would be well within Hydro's retained earnings and the company would have a decade to arrange exploration.
None of that means that exploration will return to the Labrador shelf "practically" next year. In fact, when the bids on the Labrador parcels close - almost 18 months from now - the parcels may wind up laying fallow simply because the financial situation doesn't support exploration.
If Hydro gets involved, that will be as much a political decision as a solid corporate one based on a thorough cost-benefit analysis. in fact, given the experience on the Lower Churchill it would easy to conclude the decision will be made entirely on a political basis, the financials be damned.
Now matter how you slice it, both energy minister Dunderdale and earth sciences prof Michael Enachescu are being wildly optimistic.
They are alone though. People in the oil and gas business in this province have simply slowed down. They are taking a wait-and-see attitude to everything.
After the Hebron fiasco and the Hibernia South, they've taken the practical approach of planning for the worst and hoping for the best.
-srbp-