03 March 2008

The ticking equity cost clock

Finance minister Tom Marshall likes his debt clock.  That's a little electronic thingy that ratchets up to show how much money is being spent servicing the public debt. 

It's good to mention the debt and to commit to a plan to pay down debt, but when debt servicing accounts for only 10% of your annual outlay, it's a bit disingenuous - there's that word again - to talk about debt like it was the biggest problem facing cabinet.

But it's funny in all the talk about money that the fin min doesn't talk about the escalating cost of starting up the provincial oil company.

He doesn't make a passing reference but doesn't note it as an escalating cost:

Marshall said about $350 million of that surplus will be spent on infrastructure. More than $100 million will be used to buy an interest in offshore oil developments.

The only equity outlay in the current fiscal year is for White Rose.  Hebron isn't done yet.  White Rose is actually ramping up.  Hebron 's final agreement  - and therefore the final costs - haven't been sorted out yet.

So "more than $100 million for White Rose" then.

When the project was announced initially, the actual cost of buying the 4.9% interest was pegged at $44 million.

That's it.

$44 million.

Marshall just told us that White Rose will now cost almost three times what we were told.

And before you get all excited, the so-called "handling fee" on every barrel of oil associated with the provincial shares doesn't get factored in there.

First of all, it's a fee that gets applied when the oil is pumped.

Second of all, even if we stupidly agreed to pay it in advance, that still only works to about another $38 million.  That still adds up to less than $100 million.

Third of all, the initial capital costs and operating cost shares also don't drive that number to "more than $100 million".  The first extension is set to cost around $600 million or so. take 5% of that and add it on.

In order to get the White Rose acquisition costs over $100 million we'd either have to pay every fee and charge up front, even before the work was done, or there's something else going on.

The something else might be in the discrepancy between the initial announcement of the deal and the final one.  In the first version, we were told the acquisition price of $44 million subject to "due diligence", reservoir verification and so on. In the second version - when the final agreement was done - the acquisition price mysteriously disappeared.



Not discussed.

Maybe someone should ask the finance minister what exactly that equity cost actually is.  It sure doesn't look like what we were told first.

It might well be that every day the Hebron deal goes unsigned, the cost of the project is also escalating beyond what we were originally told.