27 July 2018

Bay du Nord and Equity #nlpoli

In a staged political event Thursday that was woefully short of basic details,  the provincial government and Equinor announced they will proceed with development of the Bay du Nord field in the Orphan Basin.  The news release for the event referred to a framework agreement only.

Bay du Nord is located approximately 500 kilometres east of St. John's,  in between 1.0 and 1.2 kilometres of water.  Equinor and its partner Husky Canada believe the field contains at least 300 million barrels of light crude.

The project will cost $6.8 billion to bring into production using a floating production storage and offloading vessel similar in concept to the FPSOs used for Terra Nova (1996)  and White Rose (2002).  The provincial government acquired 10% equity in the project in addition to royalties under the Offshore Oil  Royalty Regulations (2017).  The provincial government will therefore pay $90 million initially as well as $680 million during the construction phase.

Project sanction is expected in 2020 with first oil in 2025.

The following table shows a comparison of Terra Nova,  White Rose, and Bay du Nord, with all dollar amounts in 2018 dollars.


  Cost to taxpayers 

Projected royalty

Terra Nova 
  (400 million  barrels) 

 $2.4 billion  


White Rose
(440 mm bbl)

  $3.08 billion  


Bay du Nord
(300 mm bbl)

$6.8 billion

$1.1 billion
 (equity acquisition, development, and operations)

2.66 - 2.7 billion
(royalty + "taxes")

[Updated text - original text (see below) went here]

Nalcor Oil and Gas' Jim Keating tweeted on Thursday that:
Our 10% interest in the Bay du Nord development is expected to return between $800 million-$1 billion after all costs, financing, royalty are paid. This represents about 22-24% of total government revenue for the project.
The estimate Thursday for capital (development) costs plus operating costs for the project was $10.9 billion.  That puts the cost of the provincial government share at about $1.1 billion.  If the net is $800 million to $1.0 billion,  then the gross value of the equity stake would be  between $1.9 billion to $2.1 billion. 

Since the provincial government effectively acts as the owner of all of the resources involved offshore as if it was on land,  royalty remains a far more efficient way than operating a small oil company with a small stake in project development if the goal is to gain added revenue for residents of Newfoundland and Labrador.   A small change to the royalty regime would bring the added cash or more without any of the costs  and liabilities of the oil company.

The provincial government has never explained the policy objective or rationale behind equity stakes since it started to acquire them in the Hebron project.  The energy plan referred to several objectives but none of them made sense:
Taking equity ownership in projects to ensure first-hand knowledge of how resources are managed, to share in that management, to foster closer government/industry alignment of interests and to provide an additional source of revenue.
The provincial government already had access to first-hand knowledge of how resources are managed through the offshore regulatory board.  The regulatory board also gave the provincial government not merely information on but actual control over development and the management of the offshore.  As for revenue,  the provincial government can gain more revenue from a changed royalty regime than from an equity stake and without the additional costs and liabilities.

Lastly and most significantly,  government interests and industry interests were aligned where they needed to be but diverged significantly on many issues out of necessity.  Equity stakes severely compromise the government's role as the protector of the public - that is the resource owners'  - interest or the offshore.

The Bay du Nord equity stake is also curious because in 2013,  the provincial government had backed away from the energy plan commitment to definitely take an equity interest in every offshore project. There's been no explanation thus far of the change in position on equity, particularly in light of the province's financial position.

Comments on CBC Here and Now by Larry Short that the province a choice of equity or royalties are simply wrong.  Royalties come anyway by regulation. Equity is an option for the provincial government in addition to and separate from royalties.

One potential explanation is that the equity stake addresses industry concerns about investing in either a risky project or in what may be perceived as a risky regulatory environment in Canada.  This would explain why so much of the announcement wasn't about the project but about the government's commitment to ensuring the industry flourishes in the province.

It would be similar to the enormous relief from royalty given in 2008 to the Hebron partners that was intended,  according to then-natural resources minister Kathy Dunderdale, to protect the oil companies from any drop in oil prices.  The only other time the provincial government has considered taking an equity position in the offshore was in 1992 when Gulf Canada's withdrawal from Hibernia put the future of the project at risk.


[original text:  The "?" in the table reflects the lack of detailed information from the announcement. It referred to $3.5 billion in government revenues - taxes,  royalties,  and equity - over the life of the project (10-15 years).  There was no breakdown of the amounts.

The cost to taxpayers of the equity stake is at least $770 million.  The additional amount would be the liability for a share of the decommissioning costs as well as liabilities in the event of any major oil spill or similar disaster.]

Further reading on Equity from SRBP: