09 February 2008

Conoco hints all not well in local oil patch

ConocoPhillips is working to counteract the impression left in a National Post story Friday that it was unhappy with the provincial government's equity demand for offshore oil and gas projects.

The Post reported that the company was having a hard time justifying an exploration program in the Laurentian sub-basin off the south coast of Newfoundland, based on the equity demand:
Kevin Meyers, president of ConocoPhillips' Canadian subsidiary, said yesterday one of the well's challenges is that the new regime involves the province taking an equity stake if the well produces a discovery, but not sharing in the cost of exploration, which could add up to hundreds of millions of dollars.

"That makes it a much more tolerable risk scenario for them - if you find something and it's economic, then they participate," Mr. Meyers said in an interview.

"But it does add an extra burden on the people who have to carry the exploration cost, so they are essentially carrying that ownership, and so that is one of the challenges in the regime."
As the Telegram reports on Saturday, the company issued a terse statement late Friday afternoon. The statement - issued by the vice-president of corporate communication said, in full:
"ConocoPhillips Canada continues to be interested in its deep water exploration project off the southern coast of Newfoundland and Labrador.

"This is a high-risk, high-cost project located in a harsh environment, and thus has considerable technical and economic challenges.

"We have been working with the province to progress the project and to gain better understanding of the recently released energy plan, and we appreciate the government's willingness in doing so.

"The implication portrayed in (Friday's) National Post article is that ConocoPhillips is challenging the province and the premier and that is simply not the case.

"ConocoPhillips looks forward to continuing to work with the province in order to test this unexplored region."

Go read the Post story again.

There's no implication that the company is challenging the provincial government. The operations vice president pointed to the obvious concern the company shares with others interested in further exploration. Sure there are projects underway and the province has acquired small shares of projects that have been already developed or where the so-called "equity" stake can be calculated and the financial implications controlled.

It's very different for exploration where there is more risk than guaranteed return. Exploration is the key to the long-term future of the province's oil and gas industry.

Drilling in deep water is costly. The provincial government's position is that it will assume no risk for the cost of exploration. If the wells are dry, the company or companies eat the cost fully. If the wells produce, the provincial government wants a slice of the gold medal, but no share of the pain incurred to get to the podium.

Kevin Meyers also made public what has been known in the oil patch for some time: the companies still don't have clarity on the financial implications of the province's energy plan and that is affecting decisions on exploration. Uncertainty or shifting provincial demands may also be affecting conclusion of the Hebron deal.

The energy plan - announced as part of last fall's election campaign after a decade of development by the provincial government - eliminated the existing generic oil royalty regime entirely promising that a new one would be developed at some undefined point in the future. Meanwhile, a draft gas royalty regime was unveiled, but it is still at the draft stage. A version shared with the oil companies before the plan was released was reportedly criticised sharply, in private. That's why the energy plan contained a "draft" and not a final royalty regime.

As such, companies interested in exploration suddenly found themselves with less certainty about the future than greater certainty. Meyer's comments contradicted the political spin from the provincial government that the energy plan was completed and had restored "clarity" to the ofshore's fiscal issues.

Companies like ConocoPhilips - which has potential for natural gas in it's south coast licenses - have to justify exploration costs without knowing what the overall financial implications might be resulting from a discovery. That's a difficult exercise where exploration costs are escalating anyway, outside the added costs of working in deep water.

A well drilled in the Orphan Basin last year cost a reported US$200 million, double the cost of a typical well offshore Newfoundland. Changes in the strength of the Canadian dollar also effectively increased the cost of drilling offshore by removing the dollar's discount bonus.

The companies appear to have been trying to keep their dissatisfaction quiet in the hopes that the problems could be solved more effectively behind closed doors. Meyer's remarks undermined the media blackout, hence the quick reaction by the corporate communicators to slap a happy face seal on further comment.

If the Premier responds at all and does so calmly, then the whole thing will blow over and the problems can be sorted out.

If he's having an off day and vents a little spleen, the whole offshore mess - currently contained - could spill on the streets of St. John's like a political Exxon Valdez.