Underwater duster

ConocoPhillips’ first well in the Laurentian sub-basin turned out to be a dry hole, according to The Telegram.

The company will continue with its exploration program using seismic surveys but there is no word on future drilling plans.

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Conoco hints all not well in local oil patch

ConocoPhillips is working to counteract the impression left in a National Post story Friday that it was unhappy with the provincial government's equity demand for offshore oil and gas projects.

The Post reported that the company was having a hard time justifying an exploration program in the Laurentian sub-basin off the south coast of Newfoundland, based on the equity demand:

Kevin Meyers, president of ConocoPhillips' Canadian subsidiary, said yesterday one of the well's challenges is that the new regime involves the province taking an equity stake if the well produces a discovery, but not sharing in the cost of exploration, which could add up to hundreds of millions of dollars.

"That makes it a much more tolerable risk scenario for them - if you find something and it's economic, then they participate," Mr. Meyers said in an interview.

"But it does add an extra burden on the people who have to carry the exploration cost, so they are essentially carrying that ownership, and so that is one of the challenges in the regime."

As the Telegram reports on Saturday, the company issued a terse statement late Friday afternoon. The statement - issued by the vice-president of corporate communication said, in full:

"ConocoPhillips Canada continues to be interested in its deep water exploration project off the southern coast of Newfoundland and Labrador.

"This is a high-risk, high-cost project located in a harsh environment, and thus has considerable technical and economic challenges.

"We have been working with the province to progress the project and to gain better understanding of the recently released energy plan, and we appreciate the government's willingness in doing so.

"The implication portrayed in (Friday's) National Post article is that ConocoPhillips is challenging the province and the premier and that is simply not the case.

"ConocoPhillips looks forward to continuing to work with the province in order to test this unexplored region."

Go read the Post story again.

There's no implication that the company is challenging the provincial government. The operations vice president pointed to the obvious concern the company shares with others interested in further exploration. Sure there are projects underway and the province has acquired small shares of projects that have been already developed or where the so-called "equity" stake can be calculated and the financial implications controlled.

It's very different for exploration where there is more risk than guaranteed return. Exploration is the key to the long-term future of the province's oil and gas industry.

Drilling in deep water is costly. The provincial government's position is that it will assume no risk for the cost of exploration. If the wells are dry, the company or companies eat the cost fully. If the wells produce, the provincial government wants a slice of the gold medal, but no share of the pain incurred to get to the podium.

Kevin Meyers also made public what has been known in the oil patch for some time: the companies still don't have clarity on the financial implications of the province's energy plan and that is affecting decisions on exploration. Uncertainty or shifting provincial demands may also be affecting conclusion of the Hebron deal.

The energy plan - announced as part of last fall's election campaign after a decade of development by the provincial government - eliminated the existing generic oil royalty regime entirely promising that a new one would be developed at some undefined point in the future. Meanwhile, a draft gas royalty regime was unveiled, but it is still at the draft stage. A version shared with the oil companies before the plan was released was reportedly criticised sharply, in private. That's why the energy plan contained a "draft" and not a final royalty regime.

As such, companies interested in exploration suddenly found themselves with less certainty about the future than greater certainty. Meyer's comments contradicted the political spin from the provincial government that the energy plan was completed and had restored "clarity" to the ofshore's fiscal issues.

Companies like ConocoPhilips - which has potential for natural gas in it's south coast licenses - have to justify exploration costs without knowing what the overall financial implications might be resulting from a discovery. That's a difficult exercise where exploration costs are escalating anyway, outside the added costs of working in deep water.

A well drilled in the Orphan Basin last year cost a reported US$200 million, double the cost of a typical well offshore Newfoundland. Changes in the strength of the Canadian dollar also effectively increased the cost of drilling offshore by removing the dollar's discount bonus.

The companies appear to have been trying to keep their dissatisfaction quiet in the hopes that the problems could be solved more effectively behind closed doors. Meyer's remarks undermined the media blackout, hence the quick reaction by the corporate communicators to slap a happy face seal on further comment.

If the Premier responds at all and does so calmly, then the whole thing will blow over and the problems can be sorted out.

If he's having an off day and vents a little spleen, the whole offshore mess - currently contained - could spill on the streets of St. John's like a political Exxon Valdez.

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Telling fantasy from reality in the offshore

Premier Danny Williams is quoted by the Financial Post Saturday edition as saying that the provincial government is holding informal talks with the Hebron partners aimed at getting the project back on track.

Williams has made the same claim on several occasions since talks collapsed last April but there is no objective evidence the talks are occurring.

In the immediate aftermath of the collapse, Williams made a similar claim. His subsequent comments however, made it clear the operators had merely been contacting provincial officials to confirm the provincial position in light of the Premier's comments to news media. No talks took place.

Williams made the same claim to local news media recently, but as Offal News pointed out, no industry sources would confirm anything beyond routine contacts on unrelated matters.

It wouldn't be the first time Williams made a claim that turned out to be at odds with the facts. In 2004, Williams claimed to have the support of provincial premiers for his position
on Equalization offsets. No evidence to support the claim appeared and, in fact, the subsequent criticism both publicly and privately from other provinces - particularly Ontario's Dalton McGuinty - , suggest the original claim lacked foundation. A letter from McGuinty that Williams said was an endorsement of the position turned out to be little more than a routine letter that included general good wishes on talks between the federal government and the Williams administration.

Williams has also claimed that Prime Minister Stephen Harper has committed to a loan guarantee on the Lower Churchill. Harper has said nothing of the sort publicly. His written commitments - used by Williams in the current Equalization row - merely talk of a commitment to talks aimed at exploring possible support in the spirit of Hibernia.

The federal government initially provided loan guarantees to Hibernia but also invested directly in the project when one of the partners withdrew. As well, federal finance policy favours equity investment as opposed to loan guarantees.

According to the Post story, a Chevron spokesman "denied there are discussions or negotiations underway with the province."

A quick analysis of contending interests suggests there are no talks.

For a sitting Premier, facing criticism of his handling of the offshore in an election year, it bolsters his cause to claim that talks exist even if they are nothing more than rebuffed contacts initiated by the province.

For the industry, it would do no harm to confirm that there have been informal discussions but that obstacles remain.

Their continued denials of any talks suggest that they are simply stating the fact.Allowing the Premier to save face would be a simple and cost-free way of rebuilding a relationship that appears to have been damaged significantly in the wake of the Hebron collapse.

A sign of the bad blood between government and the operators came with the rejection by the province of the Hibernia South expansion. The province offered the public excuse that they rejected the application because it lacked crucial information. provincial officials glossed over the fact that they had failed to indicate they had any questions and took no action to find the information they sought, despite having the application in hand for the better part of a year.

In a related but unconfirmed story circulating in the local oil patch, senior officials of the province's Hydro corporation are said to have visited at least one of the Hebron operators last spring, after the talks collapsed, with a simple proposition: come back to the table, accept our position on Hebron and Hibernia South will proceed without a hitch.

If that story is true, it is a clear sign that talks ended in an atmosphere that can only be cleared with radical changes in position on both sides. If the story isn't true, its very existence suggests that feelings are running high and that the ill feeling on both sidesleft in the wake of the collapsed talks will take some time to disappate.

Obstacles do remain to Hebron talks, the same ones that existed previously. The provincial government continues to insist on a 4.9% equity position and has rejected any talk of investment tax credits or tax breaks. The provincial negotiating team is still led by Hydro's Ed Martin.

For the operators, the equity position remains a key problem especially so in light of the conflict of interest in having the future operating partner acting as the lead negotiator for the provincial treasury on taxes and royalties. To follow the Norwegian model of offshore management, as opposed to the Venezuelan or Nigerian one, that conflict of interest would definitely need to be addressed if talks could continue.

At least, the Andy Wells factor has been neutralized. Williams tried to install Andy Wells as head of the offshore regulatory board in a move that may have been aimed at stacking the deck in a manner more familiar in Venezuela or Nigeria than Norway. The related matter of fallow field legislation - which in Williams version appeared to be Venezuelan-style expropriation instead of Norwegain-style management - appears to be off the table entirely as well.

Those two elements would have given Williams his apparent preferred bargaining position: he holds all the options and the other party has no choice but comply. In the absence of that level of control of the situation, it is unlikely the provincial government would be eager to return to the bargaining table. The premier's rhetoric over the past year establishes his last position on hebron as his new minimum.

Since that exceeded what the companies were prepared to accept and in the absence of any legal means to force a deal on his own terms, it would appear highly unlikely there is any hope of getting hebron back on the rails.

That is until positions or players change.

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Conoco drilling delayed in Laurentian until at least 2009

According to The Telegram, ConocoPhillips won't be drilling exploratory wells on its Laurentian basin properties until at least 2009 because of rig availability questions and problems in completing seismic surveys.

In addition to the global demand for deep water drilling rigs, the geology of the area is posing problems for seismic interpretation.

Seismic surveys are used to map what lies beneath the ocean floor. Waves of compressed air are shot toward the seabed, and the signal reflected back creates an image of rocks and pools of oil and gas that are found kilometres below the ocean floor.

In the case of the Laurentian surveys, the pulse bounced back multiple times and the images were unclear. What might have taken 10 months to evaluate took 18 months to clean up the images.

"The Laurentian Basin is an absolute frontier basin. There are no wells in the deepwater portion of that basin," said Hogg. "We are in our infancy in understanding the basin."

The Conoco land parcels are in water as much as 2,200 metres deep but only as shallow as 1100 metres. That puts them on par with the Orphan Basin and large portions of the Gulf of Mexico where the Jack 2 field was recently discovered. Even if commercial quantities of oil and gas are confirmed, the water depth involved would pose a challenge for current technology to exploit profitably.

Those practical challenges are one of the most potent arguments against any facile approach to land management such as fallow field that would demand development within as little as five or 10 years by a company or face expropriation. When it was originally discovered, Hebron was considered commercially non-viable since its heavy oil (circa API 21) and fractured structures posed significant problems for then-extant engineering and oil extraction ability. Only changes on the technical side coupled with changes in world oil demand made the project commercially viable some 20 years after it was discovered.

A Conoco spokesman also told the Telegram that

the company will continue to work with the province as it develops the royalty regime.

"That being said, it is important to us to have the royalty (regime) before we drill the well."

Premier Danny Williams told the Financial Post in an interview on Friday that the provincial government is working on a new oil and gas royalty regime. Key components of both will be a so-called "equity" position for the provincial government through its Hydro corporation.

Mr. Williams said the energy policy will require provincial equity stakes in both future oil and gas projects, but wouldn't reveal how much, other than it will be higher than the 4.9% negotiated for Hebron.

It will also include a natural gas royalty regime, which has also been expected for years, and cover environmental requirements and the electricity industry.

The gas regime has been completed and has been shared for feedback with Husky and ConocoPhillips Co., Mr. Williams said.

Unconfirmed reports put the equity demand at 10%. That could mean little to Husky, which is seeking to develop gas prospects on its White Rose project and which would be grandfathered through the equity provisions of the regime.

For companies like Conoco, however, such a demand, especially when the financial implications are still far from clear, could further delay exploration. Both Williams and his close associates have stated that the provincial government would pay for an equity position. They have yet to explain how the provincial government, supposedly labouring under an enormous debt burden, would find the hundreds of millions of dollars such a stake could cost. Nor have they stated how an equity position would provide any financial or other benefits to the province beyond the huge returns already received. Williams has consistently denigrated existing royalty regimes despite their delivering over 25% of the provincial government's own-source revenue.

if the province's royalty regime raises the cost of exploration and development beyond the company's profitability on a frontier field, Conoco's drilling program - now forecast for 2009 at the earliest - may well be pushed back further into the future.

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Conoco Canada boss looking at expanded presence

ConocoPhillip's new chief executive officer in Canada is interested in developing the company's Canadian assets.

Of the Newfoundland and Labrador offshore, Kevin Meyers said:

"There are a multitude of options out there [to reduce greenhouse gas emissions]. A lot of them will require technologies to be developed, so we are looking for greenhouse gas policies that are cognizant of this." Newfoundland: The company wants to explore in the Laurentian Basin off Newfoundland, but won't move forward until the province sets fiscal terms for natural gas production, likely in conjunction of Premier Danny Williams' long-awaited energy policy, expected this spring. "Do we want to drill? Yes. It is difficult for us to come forward with any public plans about drilling exploration wells in the Laurentian Basin until we have an understanding of what the fiscal regime is going to be," Mr. Meyers said.

Meyers told the National Post that Canada is an attractive investment prospect since its stable political and fiscal climate offsets many of the challenges of developing oil and gas fields which, as Meyers describes it "can be marginal in nature. They are always in the cutting edge of cost and service or supply, but that stability of fiscal regime helps offset that.

Meyers warned though: "You do worry when government starts to take away that advantage it has."

Like in Newfoundland and Labrador, one wonders.

Meyers should understand the political climate on Canada's Eastern Front. His last post was running Conoco's operations in Russia under Vladimir Putin.

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