18 December 2007

White Rose observations

The provincial government and the White Rose partners revealed some further detail of the White Rose expansion project on Monday.

Some observations/questions:

1. The bulk of the financial return to the provincial treasury is from the old generic royalty regime established in 1996.

2. There is no real discussion of the "equity ownership" and what it means.

With the exception of a few general references, there is no discussion at all of what is entailed in the "equity". There is no discussion of acquisition costs or other liabilities associated with it, nor is there any discussion of what - if any - management rights accrue to the energy corporation our of this stake.

There is a reference to a processing fee on "its", i.e. the energy corporation's, oil but no indication of what that means in general terms.

3. What is the "processing fee" for?

Under the agreement, the province’s energy corporation will pay a ‘processing fee’ of $3.50 a barrel on its oil.

This is essentially a fee to ensure processing capacity on the Sea Rose FPSO.

The floating production, storage and offloading vessel for the project has the capacity to handle production from the field at the approved rates. It can store and process at established rates. There is no obvious reason for the provincial government to pay a set fee per barrel to ensure capacity exists.

If this fee is one applied to all operators, then this is an operating cost, not a cost related to acquisition of an equity interest, it has been presented.

If it is an operating cost, it certainly isn't clear if the fee represents the total energy corporation share of operations or if it is a specific amount related to a certain aspect of operations. A "processing fee" of this type is sometimes applied on leased FPSOs where the vessel owner is actually reimbursed a lease rate and an additional amount for processing from the company renting the platform.

The fee may be related to a process of "deeming" what part of production belongs to the provincial government, even though the production is co-mingled with the total production. That appears to be the case, given the implication of the next sentence in the backgrounder: "To get the crude to market, there are a number of marketing arrangements already in place with existing facilities, and the province’s energy corporation will be able to tap into those."

Essentially, the energy corporation would receive the value of a quantity of oil less operating, capital and any other costs rather than receive a specific quantity of oil that it could then take to a refinery and market directly. The quantity of oil would be "deemed" or established based on a set of accounting rules.

There's nothing unusual or necessarily problematic about such an arrangement; it would just mean that the energy corporation could not necessarily load up a series of tankers and move the crude to a refinery of its choice.

So what is the fee really all about and what other fees and charges are being applied to the energy corporation?

3. There is no indication publicly of what the energy corporation will pay as part of ongoing operations expenditure or what share it will bear, if any, of phase-out or emergency response costs.

4. Will energy corp pay its portion of the provincial oil royalty on its assets? How will that be handled?