20 August 2008

Hebron announcement notes

1.  ExxonMobil drove the bus.

Well, when it comes to project timings the big player called the shots.

The companies were ready to rumble in 2006 but the disagreement put this project firmly in the pile for sometime after 2012. 

ExxonMobil never wavered from that lead-time.

They confirmed it as recently as March.

2.  How much is that doggie in the window? 

Well, how much is a pig in a poke?

The Telegram and the Mighty Ceeb fell all over themselves today with the supposed cash value of the Hebron deal at $28 billion.  Aside:  Could David Cochrane have been any more excited today hosting "On the Go"? Second aside:  Yes, the Telly's been known to endorse big deals before.

That number is bogus, though, just as Cochrane and all the others well know since - like every other cash comparison figure and any cash valuation of this project (aside from construction costs) - the numbers are pulled from the nearest bodily orifice.

The $28 billion figure tossed around today assumes an average price of crude oil between 2018 (first oil) and 2043 (project termination) of US$112 or so per barrel.  Not even the oil companies are investing based on those sorts of airy-fairy projections.  

The $20 billion figure also tossed around on Wednesday used an assumed price of oil of US$87 over the same time period.

Wade Locke projected $10 billion over the same time span using an assumed price of US$50 a barrel.  And before anyone steps in to note the words super-royalty, let us all be reminded that the super-royalty applies only when oil remains above US$50 a barrel for West Texas Intermediate.

Do the math yourself. 

What is the average price of oil over the past 25 years?

What's been the usual price of oil over that time period, as opposed to the average price?

Now take another look at the Hebron projections.

Put it another way:  when the Hibernia deal was signed in September 1990, oil prices were as low as they could have been foreseen and were foreseen.  Within two years oil was at US$8 a barrel.  Only a few years earlier, it had been forecast to attain and stay above US$100 a barrel.

The project was assumed to be a total loser when it was started;  that is, the government never expected the project to hit payout.  As it is, Hibernia will generate in excess of $14 billion in provincial government revenues over its entire life span.  The government figures today deliberately low-balled Hibernia, Terra Nova and White Rose in order to hype the Hebron stock.

The project is going ahead;  that's good.  What it's worth to the provincial treasury will only be known at some distant point in the future.

3.  A Hebron exclusive they won't discuss.

Hebron is first oil project offshore Newfoundland and Labrador that will start construction four years after a development agreement was reached with the provincial government.

Hibernia, Terra Nova and White Rose all started construction within months of the signing.

4.  So how much work will be done in the province?

Safest bet is the bare minimum committed.

The provincial government negotiating team seems to have operated on the assumption that it didn't need to lock down all possible local construction  - an earlier political commitment - since the NLRC refinery and two other projects would be sucking up the labour pool at the same time.

By the time that assumption was proven to be pretty stunned, it was too late.

The gravity base and its associated piping will be done here, along with a few other bits of simple welding like the helideck, the lifeboat rigging and the flare boom.

By the time this project starts construction - some time after 2012 - there may well be a deepening of the current global labour shortage.  Any local construction workers currently in Alberta will be even more wedded to that economy than they are now making it unlikely the "homing pigeons" will be homing. Four years from now, the labour market locally will be smaller and older than it currently is.

Add it all together and you can see that it's highly likely some shipyard in Mississippi or Korea will be slamming the topsides together for Hebron.

5.  And what about the royalty regime?

Bond Papers already went through it, in spades:

  •  The preliminary assessment
  •  The second look (it didn't get better)
  •  The lower royalty regime
  • Wider implications  (As it turns out, the provincial government will be spending cash until 2018.  That's something that never occurred on a project before.  Oil production from the other projects will decline over the next decade, despite expansion of existing fields.  That means lower government revenues. At the same time, an aging population will cause increased pressure on health care spending. The whole thing makes for a difficult strategic mix, one made all the more problematic considering that revenues are tied to the price of oil which turn out to be much lower in the 2020s and 2030s than the assumptions used as the basis for this agreement)