Strong pointed out to VOCM on Wednesday that the Hebron field won’t be the cash cow for the provincial government some people hoped/pretended it would be.
Analyst Rob Strong says he fears that on the front end of a project, that will have a 25 year life, this province won't reap any benefit for being a partner in the development.What Strong is pointing to is a deliberate cut in the provincial royalty offered as a gift to the oil companies by Danny Williams and Kathy Dunderdale in 2007. Dunderdale, the natural resources minister at the time, said that she and Williams wanted to give the multi-national oil companies “some downside protection if the price of oil went very, very low.”
Strong says when oil was at $100, Hebron type crude was being discounted by $35. He says that means in the short term, the picture does not look as bright for Hebron owners. This province has a has a 4.9 per cent share in the development.
The pair assumed oil prices only went one way. They happily traded off money at the front end in the hopes they might collect money at the back end through the so-called super-royalty. That only applied if West Texas Intermediate traded above US$50 a barrel on average in a given month. That caused a bunch of problems, one of which occurred if WTI was cheap but the benchmark for our oil – Brent – was above US$50 a barrel. That happened as recently as last year.
Under the generic royalty regime established in 1997, companies paid the resource owner – that’s you and me – a basic royalty from the start of production until they recovered their start-up costs. The rate started low but increased in stages based on length of time after first oil production and on cumulative total production.
Williams and Dunderdale were sure of themselves. In the fall of 2007 she was certain that “it's going to be a long time by anybody's estimates that we're ever going to see oil less than $50 a barrel.” That long time turned out to be about 12 months after her great pronouncement.
As SRBP noted in 2008 and 2010, the longer time it takes Hebron to reach pay-out, the more money the provincial government will lose. As Strong noted with VOCM, the heavy sour oil at Hebron is heavily discounted in global markets. That’s because it will take more work to process it and, in the end, you get less saleable material out of a given barrel compared to the lighter, sweeter oil from the other fields offshore.
In 2007, SRBP used an assumed sale price of US$38 a barrel for Hebron. That was a reasonable price then and it’s a reasonable assumption now. The different result for taxpayers from the generic royalty regime versus the Williams/Dunderdale give-away is unmistakeable.
If it took 10 years to hit payout, the generic royalty would have ultimately delivered royalties of about $142 million a year. The Williams royalty will give taxpayers a mere $19 million. The oil companies’ interests were well protected. The people of Newfoundland and Labrador? Not so much.
The cumulative result is equally dramatic.
Almost $900 million under the generic regime, versus less than $200 million with the Williams give-away. Incidentally, that was the second kick at assessing the royalty. The original is on Slideshare.
There are other problems with the deal Williams and Dunderdale cut on Hebron, but as we wrestle with the debt Williams, Dunderdale and their successors left us, it’s good to remember that in 2007, they knew whose interests they were protecting.