24 November 2016

The future will be something #nlpoli

The association representing the province's offshore supply and service businesses paid a consultant from London to look at the potential for development of the oil located in very deep water offshore Newfoundland.

As CBC's Terry Roberts tells us,  the goal of the exercise was to help NOIA members get ready for a possible increase in deep water exploration.  Land sales offshore the past couple of years have been extremely good.  Companies bid huge amounts of money for the chance to explore offshore.

The offshore regulatory board offered 13 parcels this year.  They accepted proposals with a little over $500 million for exploration on about 1.5 million hectares.  In 2015,  the offshore board accepts proposals totalling $1.2 billion on 2.5 million hectares.

That looks really good.  The consultants said so.  Could be a massive boom in exploration, they said.

Could be.

If everything goes really, really well.

Of course,  as Roberts noted,  the consultant also said that things could be a complete mess or they could be even more rosy than their rosy project.  "Projections are very difficult in volatile times"  as Roberts put it.

Yes, they are.

Ask Wade Locke.  After forecasting oil prices would always resume their climb to the stratosphere, Locke actually watched them tank.  He uttered the immortal words "I didn't see that coming." That would be funny except all sorts of people, including the provincial finance minister, took Locke's genius as a given and his ability to foretell the future as both miraculous and infallible.

Thus it sucketh to be us.

Having heard more than few of these rosy projections that turned out to be utter shite, you'd think that the locals would be a bit more cautious.  Maybe they will be.  After all, this international consultant crowd had the decency to admit that it is hard to know for sure where things are going right now. One year Locke forecast that the current state of affairs was the worst case.  The likely future was that things would be much better than they are now and the optimistic scenario was even more wildly optimistic than the likely projection.

He wasn't right, if memory serves. Plus, sensible people would take these forecasts with a grain of salt anyway.

One of the big red flags about the offshore people should pay attention to is that this year's land sale was for only half the area offered and totalled only about 60% of last year's area that actually went out on bids.  The total amount of exploration work committed was about 50% of what companies committed to last year.

As much as NOIA representatives peed their pants in excitement at what they misleadingly called "record-breaking" land sale this year,  they should have admitted that the numbers were down this year compared to last year.  That actually reflects the global reality as the world is flush with cheap oil. Companies are tightening their belts and cutting back their exploration budgets. The tendency to hype is the mark of a local industry that still has some immature aspects to work out. More mature places understand the ups and downs and can acknowledge them without feeling threatened.  

The second big rd flag about the deep water offshore is word last week that the United States Geological Survey had determined an area in Texas called the Wolfcamp shale held 20 billion barrels of oil,  16 trillion feet of shale gas, and another 1.6 billion barrels of natural gas liquids.  That's triple what the USGS believed was there in 2013.

We shouldn't plan on oil prices bouncing back too soon.  In fact, we might see oil prices drop further as the United States needs less and less oil from outside sources.  Demand in the rest of the world is still there but cheap American oil can displace a lot of  the supply from other places.  Cheaper oil and gas from the United States doesn't make it more likely anyone is going to spend money on expensive oil deep underwater in the middle of the Atlantic ocean.

The policy implication for the provincial government is that we should be careful about changing policies to encourage development of the deep water offshore at this time. Let the oil companies explore, but let's not look forward to development in the near term.  We should resist any pressure to lower our royalty expectations.

As we dial back on the distant offshore,  we should maintain the existing Jeanne d'Arc basin both for production and any future development. This is the area everyone knows best. As such,  it is likely to remain attractive into the near future.

Strategically, though, we should shift our attention to the Gulf of St. Lawrence. There is huge potential for discovery and development of oil there.  The water is shallow.  The environment is far less demanding. There are already encouraging signs  The lower cost for development than the deep water offshore means everyone could make a lot of money even in a low price market.

To encourage development, we'd need to settle the border with Quebec or come to an agreement with Quebec that would allow exploration and development.  Our expertise in government and in the private sector gives local companies an advantage in helping Quebec companies explore and develop resources in Quebec's part of the Gulf.  In some parts, the resources will straddle the border.

That makes it imperative that both governments develop a positive, mature relationship.  The sort of crass stupidity represented by Danny Williams' and his successors' approach to Quebec is something that we must reject flatly.  It led to disaster. The grown-ups need to run things and, thankfully, Dwight Ball's initial comments about his conversation with Quebec Premier Pierre Couillard reflect precisely the measured approach we need.