22 August 2008

Hebron project: less oil, higher cost, maybe less local work from MOU version

The Hebron project announced this week will focus on the estimated 581 million barrels of heavy crude of the Hebron structure itself at an estimated initial construction cost of CDN$5 -$CDN7 billion.

But that isn't what was on the table when the memorandum of understanding was announced a year ago.

The original memorandum of understanding included an additional 200 million barrels of light, sweet crude in the Ben Nevis and West Ben Nevis fields, adjacent to Hebron.

Both estimates of the oil contained in the fields came from official estimates by the Canada-Newfoundland and Labrador Offshore Petroleum Board.  They include both proven reserves as well as other resources which are believed to be present but which have not been delineated by further exploration and which may or may not be commercially recoverable. 

The lighter oil, which commands a higher price on world markets than its heavy relation could be developed by the private sector companies without government participation after the Hebron field is exhausted, and long after the capital costs have been recovered on the gravity-based system with substantial public sector subsidies. That would produce significantly higher profits for the companies, which could be gambling on a different political and global economic regime three decades from now.

That's not the only difference in the project as described in 2007 and 2008.

In 2007, the announcement included an estimated of  "development costs" over the anticipated 25 year life span of the project project as being between CDN$7 billion and CDN$11 billion.

The 2008 announcement only included estimates of between CDN$4 and CDN$6 billion for the construction phase.  It didn't mention the ongoing operational costs of the project nor the delineation and production drilling which must take place after oil is first produced, currently expected to be a decade from now.

In a preliminary assessment of provincial government financial costs for the project as announced this week, Bond Papers estimated the combined operations and delineation costs at CDN$10 billion over the life of the Hebron project.

The project start date has also been pushed back by two full years from the estimate in August 2007.  At that time the provincial government said "[f]ront-End Engineering and Design (FEED) could start within 18 months, meaning construction could commence as early 2010."

Construction is now forecast by the provincial government to start as early as 2012. The private sector companies were reluctant to commit to estimates.

There will also apparently be less work done in the province than originally indicated:

  • The 2007 MOU announcement stated that "[a]ll fabrication work will be completed in the province, with the exception of the utilities/process module" with the caveat that the work was subject to "reasonable capacity and human resource availability".  Now the UPM will be built outside Newfoundland and Labrador and the large topsides fabrication components - the accommodations module, topsides drilling derrick and drilling support module - are subject to a "reasonable physical capacity" caveat.
  • The amount of detailed engineering work to be done in the province for the gravity base has changed to provide a minimum of 50,000 hours compared with the earlier statement suggesting that all such work would occur in the province.
  • Late front-end engineering and design work that must be done in the province is now restricted to those components built here.
  • "Most FEED phase" GBS engineering has been changed to set a 50,000 hours.  There is no indication of the total anticipated amount of engineering to be done.  As with Terra Nova, project cost issues could reduce the amount of engineering work done in the province.
  • A local procurement and contracting that was initially described as handling all procurement and contracting for the project, similar in concept to Hibernia Management and Development Corporation (HMDC) is now described simply as handling procurement and contracting activities. This could be confined to work done within the province, with other procurement and contracting done elsewhere.
  • The project management office in the province must commit only to provide one million hours of project team activity in the province prior to first production.  That would be roughly equivalent to 50 people employed full time for 10 years or 100 people employed full-time for five years.