For those interested in this sort of detail, and from the good folks at the Hebron project website, comes this picture of the project timelines:
Note that the partners don’t anticipate giving this project the green light until the early part of 2012.
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In the House of Assembly on Wednesday, natural resources minister Kathy Dunderdale confirmed what Bond Papers told you about on December 11:
There are no provisions of the final benefits agreement signed in August 2008 that cover a work cancellation and mandate that it has to be replaced by work of equal value or the cash equivalent.
Dunderdale issued a highly misleading news release on December 11 that claimed “any such issues were contemplated in the Benefits Agreement and the replacement value of the work was captured and protected."
As you learned here last week, nothing could be further from the truth.
Dunderdale told the legislature on Wednesday (December 16) that the agreement contained a provision on amendments and another on dispute resolution. There was no dispute, according to Dunderdale, as the parties came together and achieved an agreement.
Well that’s not the same as having “the replacement value of the work” already “captured and protected”. That’s not “copper-fastened”, either as Dunderdale also claimed. That’s people getting together and hammering out a new deal which could include provisions among the partners as to who will foot the bill for what amounts to a political decision – the replacement benefits – rather than a purely commercial one.
. And as for that section on amendments, here it is in its entirety:
No amendment to this Agreement is effective unless made in writing and signed by authorized representatives of all Parties
Nor is the new deal an actual, finalised agreement. As Dunderdale told the House of Assembly, there is an agreement in principle that must now be translated into a legal document. There’s still lots of room for further changes, in other words in a project not due to be sanctioned until 2012.
By the end of the questioning, Dunderdale became so rattled that she abandoned her false claim last week that the benefits were secured within the agreement:
Mr. Speaker, the parties came together, we did not even need to use mechanisms provided in the Hebron Benefits Agreement. [Emphasis added]
That pretty much blew what was left of her credibility out of the water.
Dunderdale also disclosed that the total value of the cancelled work is less than $50 million. Her office earlier refused to disclose what they claimed was commercially sensitive information.
The Hebron partners – including the provincial government’s NALCOR Energy -cancelled the work because it was deemed “uneconomic and has significant execution and schedule risks” for the project Dunderdale estimates may cost as much as $7.0 billion.
If the agreement in principle is actually signed, it is unclear at this point if the $50 million of replacement work will be provided by the oil companies or by the provincial government’s energy company in its capacity as an equity partner on the project.
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Under questioning in the House of Assembly on Monday, natural resources minister Kathy Dunderdale couldn’t point to a section of the benefits agreement that allowed a replacement of work cancelled by the Hebron partners in September.
Dunderdale could only say that there was an unspecified “sub-agreement”.
She’ll probably have trouble finding the magic clause she thinks is there. The benefits agreement is specifically identified as a stand-alone document that isn’t affected by other parts of the overall deal except as provided within the benefits agreement. There’s no section that refers to offsets for cancelled work.
Dunderdale told the legislature the provincial government was represented through NALCOR Energy as the equity partner when the decision was made to chop the “sub-sea drilling template and the components of the field mooring system and positioning and docking system.”
However, when asked about the potential impact on communities like Marystown, Dunderdale answered as if the provincial government didn’t have an equity stake:
Mr. Speaker, some of these questions are better put to the operators to explain the scope of work, the magnitude of work, the kind of expertise that is required and the kind of services that are going to be required to do this work. All we can do, as a government, is negotiate an offshore oil and gas project with specific benefits around the kind of work that is required to construct. In this case, Mr. Speaker, modification needs to be made in order to reduce delays and proper execution.
She’s right, of course. The 4.9% stake amounts to exactly nothing when it comes to substantive decisions if the government acts as an oil company/partner. The Big Players needed to “reduce delays and [ensure] proper execution” and the provincial government – apparently reduced to a bit player - simply followed along.
That evident lack of control exercised by the provincial government is the opposite of what people were told when the equity stake idea was being sold politically. But it is consistent with the spirit of a section of the financial agreement that obliges the provincial government to back the oil companies on any regulatory issues as the oil companies see fit.
The Hebron partners were originally supposed to submit a development application this month to the offshore regulatory. However, the changes made to the fabrication program a year after final agreements were signed points to the potential for further delays.
The Hebron project is not yet sanctioned by the partners. Under the agreement with the provincial government, they do not have to sanction the project – that is approve it for development – at all. They don’t have to green-light the development even if the project clears regulatory approval.
The final agreements signed in 2008 provided for less oil and possibly fewer local benefits than the 2007 memorandum of understanding.
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The highly touted Hebron offshore oil project hasn’t completed environmental review, it hasn’t been sanctioned and there’s no development application yet but already the amount of work on the project is being scaled back, according to news release from the province’s natural resources department.
According to the release, project lead ExxonMobil has informed the provincial government that it won’t be building the “sub-sea drilling template and the components of the field mooring system and positioning and docking system.”
The release says the elements are “uneconomic and come with significant execution and schedule risks.” Put another way that likely means the companies don’t believe the work can be completed in the province and the alternatives are too costly to consider. The work will now be scratched entirely.
And while the provincial natural resources department claims the cancelled work will be replaced, there’s no guarantee that will actually occur.
The release quotes natural resources minister Kathy Dunderdale as saying that the provincial government “had the foresight to ensure that any such issues were contemplated in the Benefits Agreement and the replacement value of the work was captured and protected.”
There are no provisions of the final benefits agreement signed in August 2008 that cover such a cancellation.
And what’s more the release confirms there’s no such provision when it states that:
An amendment to the Benefits Agreement will now be developed by the parties to implement this arrangement.
If the situation was already “captured and protected” there wouldn’t need for an amendment – that is, a change – to the benefits agreement.
The benefits agreement contains a clause (3.3) which exempts the companies from having to provide any benefit contained in the agreement unless the offshore board approves the benefits plan, the federal and provincial ministers approve the plan and the project is sanctioned.
At least two of those three preconditions have not been met.
The agreement does contain a dispute resolution mechanism. There’s no indication if that has been triggered or if it may be triggered should the companies and government fail to agree on replacement benefits.
But wait: it gets better.
The same news release claims that “[s]hould the operator be unable to identify an equivalent amount of replacement work by June 30, 2010, a payment will be made to the province equal in value to the amount of work not replaced. These funds will then be used by government for a construction project for the benefit of the oil and gas industry.”
The public will never know because the department is refusing to release the value of the cancelled work.
Contacted today by Bond Papers, a spokesperson for the department refused to release what was described as “commercially sensitive” information.
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“Securing equity means having greater leverage to control our own destiny.”
“The principle of making our own way and taking control of our resources is the right one.”
Two quotes from the Speech from the Throne,
House of Assembly, March 2008
_______________________________________________________________
Control is a key principle in Danny William’s political philosophy.
Control of the province’s natural resources is a core point in most of his administration’s public statements on oil, natural gas and electricity.
The word occurs twice in his recent letter to Shawn Graham about the proposal to sell NB Power to Hydro Quebec. There’s the reference to “New Brunswickers who no longer control their energy destiny.” Then there’s the contrast: “ But we took control of our own destiny and Nalcor Energy is now a crown jewel in our province’s energy assets.”
Williams also raised the concern about control of transmission routes supposedly resting in the hands of Hydro Quebec and of the control of rates resulting from the sale of NB Power.
Energy and control go together, as Williams made clear when he announced in 2006 that the provincial government would “go-it-alone” on the Lower Churchill. he made the following comments in the House of Assembly on May 8, 2006:
“...but the big message here is that we are masters of our own destiny, that Newfoundlanders and Labradorians are in control of this project for the benefit of Newfoundlanders and Labradorians."
- "By taking the lead we are in full control of the project, unlike the circumstance with the last government; that project, basically, was going to be controlled by Quebec. It would have been marketed, it would have been financed, the transmission would have been done by Quebec. The control of the project, the project management, would have been done by Quebec. As well, if there had been an overrun on the project, the last Lower Churchill project that was proposed by the Grimes government, in fact, we could have lost the project; because, if there had been an overrun, we would not have been in a position to be able to finance it….”
But control is not just a principle behind energy initiatives. Being “masters of our own destiny” is the same idea in other words and it crops up repeatedly in Danny Williams’ speeches and comments as an idea central to government policy.
Control is a principle of the administration’s policy. It is a guiding rule, an essential quality, or the basis for action.
The relationship between resource control and equity is established clearly in the Conservative party’s 2003 election platform.
The section on resource development puts it this way:
The power to control development of offshore oil and gas is of little value unless the Province has the know-how to deal with technical issues and field assessments equivalent to the expertise of the major oil companies, and sufficient ownership in production licences to influence development decisions.
- A Progressive Conservative government will either restructure Newfoundland and Labrador Hydro as an energy company, or create a new Energy corporation, with a mandate to retain equity in the Province's oil and gas resources. This will be done on a go-forward basis.
The relationship is mapped out more plainly in the 2007 energy plan released in time for the 2007 election campaign. So important is control that it is the second principle guiding the plan, after sustainability:
Our Principles
1. Sustainability
…
2. Control
We will exercise appropriate control over the development of our resources to ensure they are managed and used in the best interest of the people of Newfoundland and Labrador. We will assume an ownership interest in the development of our energy resources where it fits our strategic long-term objectives.
The idea is repeated again in what, by now, is a familiar formulation in a discussion of energy resource management (p.13):
We will take more control than in the past over the development of these resources and the benefits they generate.
Having identified the importance of control and the connection to management, management, the plan then re-affirms that equity stakes in energy projects are the first lever used “to ensure sound and effective management and to maximize benefits over the long term.” (p.18)
Control and equity stakes are thus intimately connected in the Conservative philosophy.
The 2003 campaign platform identified the key role to be played by a new energy corporation in holding the equity stakes and thereby serving as the means by which the provincial government would exercise the sought-after control of energy resources.
As well, the energy corporation has other key control responsibilities set out in the energy plan:
- “If the Provincial Government [sic] lifts the moratorium [on small hydro projects], it will institute a policy that the Energy Corporation will control and coordinate the development of small hydro projects that meet economic thresholds and are viable for an isolated island system.”
- “One of our goals is to maximize our benefits from resource developments. We believe this means the Energy Corporation should control the development of all small hydro developments for the benefit of all electricity users and determine whether to do this alone or with private sector partners.”
- “To maximize these benefits [from wind power], the Provincial Government believes the Energy Corporation should control the development of all wind projects and determine when to develop alone or with private sector partners.”
- “Due to the strategic importance of generation and transmission to the future of Newfoundland and Labrador, the province, through NLH [Newfoundland and Labrador Hydro], will retain ownership and control of its existing transmission and generation assets”
To anyone familiar with the Williams administration, none of this will be new. in fact, it will be so familiar that one might wonder the point of such an extensive recitation of the relationship between the principle of control and the idea of equity stakes in Danny Williams’ philosophy.
That will become clear in the second instalment of this series.
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Equity
According to the backgrounder released on Tuesday, the provincial government’s oil company will acquire a 10% interest in only that portion of the extension to be developed through tie-backs.
That has been described as covering 170 million barrels, however, as with Hebron that figure may become smaller in the final agreement.
The acquisition price is $30 million however the backgrounder provided no estimates the development costs, operating costs or other costs associated with the project.
According to some sources, part of the delay in reaching the memorandum of understanding came from re-unitizing the existing licenses, especially EL 1093. There are seven interest-holders in that license with four of them having less than 10%.
As with Hebron, details of the acquisition agreement will not be made public. As with Hebron, information crucial to a thorough assessment of the acquisition and the provincial government’s share will remain hidden from public scrutiny.
Industrial and local benefits
Aside from existing benefits arrangements under the Hibernia development plan and offshore regulatory board regulations, no new or enhanced local benefits are contained in the backgrounder.
The project will be developed using a combination of slant drilling from the existing Hibernia platform (50 million barrels) and sub-sea tie-backs to the platform. This was not a part of the 2006 application.
However, planned expansion of the Hibernia GBS appears to have been shelved. This significantly reduces the potential amount of local work available. The project is smaller than what was suggested last June when the Premier indicated a Hibernia South deal would be in place by the end of 2008.
"We fully expect Hibernia South to be concluded by the end of this calendar year," Williams told more than 700 people attending the annual offshore conference hosted by the Newfoundland and Labrador Oil and Gas Industries Association (NOIA).
As it turned out, the MOU was signed in mid 2009 and final agreements are not expected until early 2010. That would be three years after the provincial government vetoed the development and two years after the oil companies originally planned to start production.
Local companies already have demonstrated expertise in supply and in fabrication of sub-sea components. Thus, local companies should be able to secure fabrication and related work on the project.
This is particular interesting since two of the four reasons given for vetoing the development plan in 2007 related to local benefits:
Through the MOU, the provincial government also accepts the offshore board’s position in the voted application with respect to local benefits (affirmative action, research and development and education and training).
This is significant since these aspects of local benefits were cited as an area of concern for the provincial government with the board’s approval of the plan. In a subsequent exchange of correspondence energy minister Kathy Dunderdale accused the offshore board of failing in its responsibilities for local benefits yet it appears the government has ultimately accepted what the companies initially proposed and board approved.
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Some randomly selected articles from around the world on the current state of the oil industry.
1. Omani oil revenues in the first four months of 2009 are down about 50% from the same time last year, according to Reuters.
2. Expect a downward oil price correction shortly, according analysts quoted in the Edmonton Journal. They put the drop to the low 60s or high 50s a barrel. [Hint; they’re conservative; think lower still] Among the factors cited: weak demand, new production coming on stream and tons of oil currently in storage onshore and offshore that doesn’t have a market yet.
3. Of course,the peak oil cultists are still predicting the opposite so they see any lowering as just a temporary calm before the Apocalypse hits.
4. Scan to the bottom of this article on a recent meeting of PetroCaribe and you’ll see reference to Cuban oil potential:
In the case of Cuba, Venezuela's financial and energy support is critical to supporting the Castro regime. Energy dependence has long been Cuba's Achilles' heel.
Havana used to depend on the east bloc for cut-rate oil, and plunged into economic chaos and blackouts when it was cut off after 1989. Now it depends on crude from ally Venezuela.
Cuba is negotiating oil exploration and production deals with Russia, China and Angola, with Moscow shaping up as the partner that could make the communist island energy self-sufficient, if its untapped offshore reserves pan out.
If it can achieve energy independence, Cuba may in the blink of an eye turn from a cash-strapped developing nation into a flush oil exporter, possibly projecting its current regime years into the future.
Cuban authorities in October announced that the Caribbean nation's crude reserves were more than double what had been thought, and now were estimated to be about 20 billion barrels.
5. OPEC oil production rose slightly in May, up again from a slight rise in April. Compliance with the OPEC production quota dropped again in May with Venezuela, Iran and Angola exceeding their quotas. Go back to the article on PetroCaribe and you’ll see Venezuela is in the middle of a little local power play involving oil. Venezuela runs an oil rent-to-own scheme in which countries in the region can buy Venezuelan crude on credit.
6. Still, OPEC lowered its oil demand forecast for 2009, which only makes sense in the current real market.
7. While there may be some dispute as to whether Cuban oil potential is 20 billion barrels or five billion barrels, there’s no doubt interest is growing in developing the Caribbean nation’s offshore resources.
Either way, Cuba’s oil is attracting the attention of oil companies from around the globe. At the moment, Spain’s Repsol, Brazil’s Petrobras, and Norway’s StatoilHydro are overseeing exploratory drilling in the Gulf of Mexico. India, Malaysia, Vietnam, and Venezuela also have signed deals with Cuba.
Maybe Cuban oil potential is behind signs of a thaw in American-Cuban relations.
8. Closer to home, there’s the NOIA oil and gas conference next week and with it, the annual speculation that Premier Danny Williams might say something earth-shattering despite the fact that making an announcement there would involve sharing the spotlight with NOIA.
He hasn’t done anything like it before but people still like to stoke the hype. Last year CBC got suckered into the whole thing in a big way; this year it’s the Telly’s turn on a smaller scale and focusing on Hibernia South.
Now if the Hebron thing is anything to go by, what comes out the end could be a whole lot less than the hype suggested and some of the details have some really disturbing implications. Of course, hype is more fun than details.
9. Speaking of the NOIA conference, the theme this year focuses on the potential for the Arctic.
There’s the global perspective:
SESSION 2: TECHNOLOGIES FOR ARCTIC ENVIRONMENTS 2:30 p.m.
Russia’s Shtokman Project: an Update
Sergey Smityushenko, First Deputy Governor of Murmansk Oblast, RussiaExploration and Production Options for the Alaskan Offshore
Mike Paulin, President, IMV Projects AtlanticPushing the Envelopment: R&D Advances for Arctic Oil and Gas Development
Jim Bruce, Deputy Director Ice Engineering, C-CORECanadian Frontiers Operating in Harsh Environments
Peter Haverson, General Manager, Global Drilling, International and Offshore, Petro-Canada
And the local one:
SESSION 4: FARTHER, DEEPER, COLDER 2:30 p.m.
Chevron's Growth Strategy for Atlantic Canada
Mark MacLeod, Atlantic Canada Manager, Chevron Canada LimitedGreenland - A Steppingstone to Arctic Exploration
Gregors Dam, Chief Geologist, Dong EnergyPlaying to our Strengths
Mark Shrimpton, Principal and Practice Director, Socio-Economic Services, Jacques Whitford StantecDefining the Outer Limits of Canada's Continental Shelf in the Atlantic and Arctic Oceans Under the Law of the Sea
Jacob Verhoef, Director, UNCLOS Program, Natural Resources Canada
That last session is one to watch since the issue of oil development at and beyond the edge of the continental shelf has implications for any developments in the Orphan Basin offshore Newfoundland.
And for those who are missing their fix of the government’s favourite economist, don’t worry. NOIA is doing it’s bit to keep on good terms with government.
Not only is there a reception at The Rooms, but Wade Locke is the lead speaker in the last session. He’ll be talking up “Offshore Oil & Gas, the Economic Crisis & the Local Economy”.
If he sticks to his more recent lines, this should be fun. Prediction: He won’t be hyping non-existent aluminum smelter projects just as the demand for aluminum collapsed. He might talk about the current economic situation but he might have to be more cautious about undermining the provincial government’s “we live in a bubble, all is well” talking point since the last time Locke’s comments were reported accurately, he got upset.
Right after Wade will be the provincial energy corporation’s Jim Keating who will, in all likelihood, be talking about the Lower Churchill.
Of course, that’s pretty much all there has been about the project:
And that’s just some of the stuff that hasn’t really been covered in any great detail in local media on the most talked about paper project in history.
Even if the Premier doesn’t lead off with anything Earth-shattering, there’s a prospect Jim and Wade can finish the NOIA conference with something really newsworthy.
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What natural resources minister Kathy Dunderdale said in March 2007 about the offshore regulatory board’s regulations for research and development spending:
“The board is only requiring these operators to spend in this province in accordance with what has been the average and accepted norms in the industry elsewhere.”
What she signed in August 2008:
5.9 (D)
The Proponents shall seek Board approval of its plan to invest a fixed amount of one hundred twenty million dollars ($120,000,000) in Research and Development during the life of the Hebron Project, and the Province shall advise the Board of its full support for such Research and Development plan as described in (A), (B) and (C) above as the entire amount of the Proponents’ Research and Development obligations in respect of the Hebron Project.
What she said in February 2009, when the oil companies lost their last bid to appeal the offshore board’s research and development rules:
“The Provincial Government has taken major steps to strengthen R&D planning and capacity in the province through initiatives outlined in our Energy Plan as well as through the creation of the Newfoundland and Labrador Research and Development Council,” said the Honourable Kathy Dunderdale, Minister of Natural Resources. “The R&D guidelines complement these major initiatives.”
Maybe Kathy hadn’t read that thing she signed in 2008 since the fixed amount she agreed to back, is less than the offshore board’s r&d regulations would require.
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A curious extract from the financial agreement that was part of the Hebron development deal:
5.1 Support of Province.
The Province shall, on the request of the Proponents:
(A) assist and support each of the Proponents in seeking modifications for federal fiscal enhancements to the extent that such enhancements do not, in the opinion of the Province, have a negative financial impact on the Province, or where such enhancements do have a negative financial impact, they have been offset to the satisfaction of the Province by the Proponents;
(B) use all reasonable efforts to assist the Proponents in securing commitments from Canada and municipal governments in the Province regarding the legal and regulatory framework applicable to a Development Project; and
(C) support the efforts of the Proponents in responding to any future legislative and regulatory changes that may be proposed by Canada or a municipal government in the Province that might adversely affect any Development Project, provided such action does not negatively impact the Province or require the Province to take any legislative or regulatory action respecting municipalities.
Talk about your little gem of a concession to the oil companies.
This section commits the provincial to support any or all of the proponents on any action taken by the Government of Canada that “might adversely affect any” development project on any of the lands covered by the agreement.
What might we be talking about here?
Well, it’s pretty wide open. If you look up the definition of “Development Project” in the agreement you’ll see it’s broad enough to cover every aspect of the project from start to finish, including environmental considerations. If the proponents think the idea is bad, then the province is obliged to help out. It doesn’t have an option; if the proponents ask, the “Province shall.”
And before you note the little provisos there about the Province and the conditions under which it doesn’t have to lend support, bear in mind that the definition of the Province in the agreement is also pretty tight and tidy:
“Province" means the Province of Newfoundland and Labrador, Her Majesty the Queen in Right of the Province of Newfoundland and Labrador, or the geographical territory of the Province of Newfoundland and Labrador, as the context may require.
Now this gets even more squirrely when you consider that the provincial government co-manages the offshore with the federal government through the Canada-Newfoundland and Labrador Offshore Petroleum Board. The sort of regulatory changes we are talking here are ones that are most likely to come through the offshore board.
Environmental regulations, shipping regulations, changes to safety requirements, that sort of thing: all covered through federal legislation since the offshore is legally in federal jurisdiction.
Even fallow field is covered by this provision. If a future federal government wanted to change land tenure in such a way that it would affect lands covered by Hebron, the provincial government would likely be obliged to toe Big Oil’s line. If the proposed federal regulatory “enhancements” actually worked out well for the provincial government, the Proponents can cut a side deal under this clause to secure their support to fight the “enhancements”.
Not a bad little clause.
Well, not bad for the oil companies, anyway.
This provision is even more squirrely because the provincial government – through the minister of natural resources (Kathy Dunderdale) and the provincial representatives on the offshore regulatory board – will not only carry on all this lobbying at the behest of and on behalf of Big Oil in the first place, they can do it from behind closed doors.
There isn’t a single clause there that would oblige the provincial government to disclose its lobbying on behalf of the oil companies; no disclosure to the public and indeed no disclosure to anyone.
Seems like a pretty big conflict of interest, but not one that should come as any surprise given that government’s policy is to be both a regulator and an operator simultaneously.
That’s pretty much the definition of conflict of interest as we’ve discussed here before, particularly when the talks broke off in 2006. We also raised the issue given the Premier’s curious claim after the recent helicopter crash that – despite the fairly obvious – the provincial government didn’t have a regulatory role in the offshore.
It also shouldn’t come as a surprise given that the Hebron deal sets the local research and development below the levels set by the offshore regulator. Government accepted that low amount - and the pledge to back Big Oil - after the offshore board won a court case against Big Oil over just those sorts of levies set retroactively by the offshore board. Next time out, Kathy Dunderdale or her successor will be working to make sure the regulatory changes don’t get out of the board in the first place.
All of that pales in comparison to the clause in a fiscal deal that obliges the provincial government to back the oil companies whenever the companies ask.
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Human resources minister Susan Sullivan appeared on local talk radio today responding publicly to a letter by Grand falls-Windsor lawyer Mark Griffin. In a letter to the Grand Falls-Windsor Advertiser, Griffin raised several questions about government’s expropriation of AbitibiBowater assets including hydroelectric generators.
Sullivan gave radio listeners three reasons for the expropriation. The first – and most important – is one that government used from the start: no one wanted to see the company walk away with “our resources”. The line doesn’t hold up any better now than it did before. The assets weren’t going to leave the province in any scenario and that’s especially true of the hydro generators which could only produce power in Newfoundland.
For many there has been a suspicion from the outset that there was more to the story than met the eye, much more than the nationalist chest-thumping and theatrics surrounding the expropriation bill.
New information points to an answer to the nagging question of why the provincial government expropriated the hydroelectric assets, including Star Lake which never supplied power to the Grand Falls paper operation. It’s an answer that harkens back to the failed Hebron negotiations in April 2006.
In a February 13 interview with Business News Network’s Howard Green, Abitibi chief executive David Paterson said the provincial government moved to expropriate AbitibiBowater’s assets in Newfoundland only after the provincial government lost out in the bidding for Abitibi’s interest in one of its hydro projects. [video link]
“We hadn’t said we were going to sell the assets,” said Paterson, “other than we had a deal on a joint venture power dam and our partner [in that project] was going to buy us out…”.
Paterson said the provincial government - presumably Newfoundland and Labrador Hydro - had bid for the AbitibiBowater interest in the joint venture but had been outbid by the partner. He said the provincial government had been “blocking the transfer” to what Paterson described as an existing investor in the province.
“and now they’ve expropriated them as well,” said Paterson.
Ironically, Newfoundland and Labrador Hydro is reportedly handling the compensation talks with all the companies whose assets were seized. Paterson told the Globe and Mail on 17 December: “[It] basically consists of Newfoundland telling us what they are going to do and we have to comply.”
The description of the partnership sounds like Star Lake, a joint venture between Abitibi and Enel North America. The Star Lake partnership came in response to a call for proposals in the early 1990s from Newfoundland and Labrador Hydro for a small hydro projects that would displace some of the generation at Holyrood. The project sold power directly to Newfoundland and Labrador Hydro.
Star Lake was expropriated in December 2008.
To date neither the provincial government nor the companies involved have answered any questions about the expropriation. Earlier this month, the province’s natural resources department refused to answer a series of questions on the expropriation posed by Bond Papers. The questions included ones that went directly to the issue of Star Lake:
If Abitibi wasn’t planning to sell its other hydroelectric assets in the province, the company may have been looking to sell its power directly to the Vale Inco project at Long Harbour. All that stopped, as would the possibility of selling the hydro assets to Vale Inco, one the privately held generation was seized by the provincial government in December.
This also puts a different light on one of the curious lines in the provincial government’s news release on the Long Harbour project:
The company has also agreed that it will pay the island industrial rate for its power supply, surrendering its option to have a better rate should other industrial customers obtain a better rate for whatever reason.
Once government seized the Abitibi assets and all the company’s water rights, Vale Inco didn’t have a choice. The existing assets were gone as were three projects which together could have supplied Vale Inco’s power needs. There wasn’t any way to develop an alternative to NALCO’s government-enforced monopoly position.
The notion of seizing assets after a failed negotiation isn’t new, either. In 2006, the Premier public vilified the partners in the Hebron talks when negotiations collapsed. He talked openly about the need for legislation which would allow government to seize properties containing commercially viable oil finds if the finds were not developed within a certain period of time.
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In July 2006 when Danny Williams accused ExxonMobil of denying the provincial government access to the books for the Hibernia project there was a lot more to the story either than what he said or than just his fit of pique at the failure of talks to develop Hebron.
Williams put it in another context altogether at the time, claiming the company had reneged on a commitment to “audit process to validate statements by the company that the Hibernia project was not meeting the owners’ expectations.”
As it turns out, the reality – revealed almost three years later by the province’s auditor general in his annual report for 2007 (year ending 31 March 2008) - is that the provincial government was and is behind in its own audits of offshore oils project reports:
… At October 2008 [sic], there were 87 annual royalty and eligible project cost submissions made by project
owners for which the Department has not started any audit work. No royalty or eligible project cost audits have been conducted on the Terra Nova or White Rose projects since production started in 2002 and 2005 respectively.
On top of that the department’s audit manual was approved in 2000 but hasn’t been updated in the intervening seven years.
The auditor general also revealed that the department had quietly dropped its 2006 demand for access to the Hibernia books claiming they could adequately assess the issues without the company’s documents.
Each of the 15 companies operating offshore are required to file monthly and yearly operating reports with the provincial government. They must also file an audited financial report annually on project costs. All these are used to calculate royalties paid to the provincial government’s royalties and benefits division of the natural resources department.
The majority of the outstanding audits, shown in the chart at left taken from the auditor general’s report, are for the period after 2003.
In early 2006 - the year Williams made his accusations against ExxonMobil and the year before the one audited by Noseworthy – then natural resources minister Ed Byrne told a House of Assembly committee that his department was experiencing staff problems in the division of his department responsible for the royalty and cost audits.
MR. E. BYRNE: Difficult not only to attract, difficult to maintain. A lot of this, too, is part and parcel of the energy policy review that is ongoing and the dedicated resources we put to that. Within the Department of Natural Resources, the energy division is most challenged, more than any other division within the department, on not only recruiting but maintaining.
We had senior petroleum auditors who left for double the salary. We recently had an ADM who took a job in Calgary. I do not know what his salary was or what he was offered. He was making a competitive salary here, but it was a significant offer. Those are issues that the deputy and government struggle with everyday. Anyway, that is part and parcel of the change in direction there.
Within the local oil patch the migration of senior, experienced public servants to the private sector caused a great deal of chatter.
The problem hasn’t gone away. Last May, natural resources minister Kathy Dunderdale told the House of Assembly’s Resources Committee that there had been a number of vacancies in the audit division and that the department was hiring outside contractors to take up the slack. She said the audits were “Behind, big time.”
The department’s deputy minister - Chris Kieley - told the committee:
For those three projects [Hibernia, Terra Nova and White Rose], and with the increased activity, every year we are doing audits but, because of the turnover in staff, because of the resources that were assigned to that particular piece in previous years, the audits were behind; so, this past year and the year before we have made a particular effort to get those audits up to date and we have used outside assistance through auditing firms to help us do some of those audits. So, we have a combination now of outside accounting firms helping us get the audits up to date and we have our own staff working on the audits as well. We are working on a number of different audits now with all our projects at this point.
Kieley also insisted in May that
“[w]e are within the timelines prescribed by legislation (inaudible) the Hibernia royalty contract, but we are behind and we are putting extra effort into this whole piece to get caught up. When I say behind, we have not lost any ability to audit these. What we are saying is that we would like to get them up to a closer time frame.”
Auditor General John Noseworthy noted in his report that the Hibernia audits completed had revealed $8.66 million owed to the provincial government. In her testimony to the resource committee, natural resources minister Kathy Dunderdale insisted, however, that “there has been nothing earth-shattering that we have come across to this point.” The completed audits done in May 2008 are almost identical to the ones listed as finished by the auditor general in his report.
Noseworthy also noted that the department had committed to completing all outstanding audits by 2010. At the same time, though noted that even the 2008 schedule was off, largely due to staffing problems within the natural resources department.
In 2008, the work plan was amended to move 2400 hours of work scheduled for White Rose to 2009 as a result of audit work done for Hebron. As of October 2008 – half way through the fiscal year - an external contract for an auditor had not be let for 2008.
The 2008 audit plan was based on 1400 hours for four staff positions supposed to be filled by the start of the fiscal year. By October 2008, one position was still vacant. Another was filled in July and only two of the original four planned were in place in April 2008. Associate deputy minister Pierre Tobin gave the resource committee a different version at the committee hearings in May. Rather than disclose that two audit positions were vacant, he left the committee with the impression the division was “almost fully staffed”:
That would be, in the past year, a number of auditors, but those positions have since been filled for the most part. There would also have been a couple of development officers and a couple of economists. We are almost fully staffed, particularly in the royalty audit section. We are down one person out of upwards to a dozen, I guess; we are doing really well there. [Emphasis added]
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Newfoundland and Labrador is usually one of the last places to catch a trend. Doesn't matter if you are talking fashion or, in the latest version, government economic and fiscal policy, it seems to take a while for things to catch on here.
Late on Friday afternoon newly minted finance minister Jerome Kennedy issued a news release trumpeting a credit rating by Standard and Poor's as proof of the provincial government's "fiscal prudence and sound policies".
Well, maybe catch up is the better word.
There isn't a government left in the developed world that is still pushing the sound fundamentals media line now almost two months after the start of the current global economic crisis. No government is claiming some sort of credit for being able to weather a storm that, in many minds, is far from over.
Well, no government except the one here.
If you want to understand why everyone else's tune has changed, take a look at the five year trending in crude oil prices. You can find an example in the WTI futures box on the right hand column. Click on the "5Y" symbol.
Four years to get up to US$147 a barrel and a mere four months to tumble below US$50. The steepest declines have come in just the past two months.
The speed of the price collapse should be a clue to analysts that the assumptions used before July to predict that oil would remain at unprecedentedly high prices for the rest of time were faulty. The security premium, supply concerns and overheated speculation drove prices to the peak last summer but in addition to all that the superheating of the global economy, fueled by loose American regulations pushed things beyond anything that would be considered normal and rational.
In other words, the price of oil has been artificially high for a very long time. Given that markets have a way of correcting themselves at some point, it was really only a matter of time before a correction - a downturn - took the heat out of things. The only thing that couldn't be foreseen, and that's about the only thing, was how steep a correction was coming and how it might last, but come it would as surely as it has come at every juncture in the past.
Fewer and fewer analysts are holding to the old projections, some of them dating back several months. Some of the more influential sources, such as the International Energy Agency, are forecasting high prices. However, many are revising their short term projections markedly downward. Deutsche Bank, among others, is projecting crude at US$40 per barrel by April 2009. One analyst - Robin Batchelor - who in May 2008 predicted high oil prices well into the future is now likening the current climate to one 30 years ago:
"On the upside it always overshoots and the same is true on the downside. What I’m looking at is the commodity supply and demand equation; long term there are still supply issues but on the demand side we’re facing downdraft," he points out. "The last time we had a fall of that magnitude was in 1979/80/81."
While Batchelor for one has not abandoned his high price forecasts, he has certainly altered his view dramatically. The reason is simple. While he and others once assumed ever increasing demand, the current correction may alter the demand side of the price equation that can't be seen right at the moment. If the current downturn lasts well into 2009, as most expect, the IEA, among others, will likely go back and rethink their projections just as they revised their assumptions three years ago when they thought US$50 a barrel was the peak.
Closer to home, though, the hope in the old assumptions remain strong close to home. This week, economist Wade Locke told Memorial University's student newspaper The Muse that:
“The longterm [sic] price forecast is still in the $80- to $90-range for oil and that will not affect Hebron, White Rose Extension, or Hibernia South. Even if [oil] prices were to stay around $60, these projects would likely proceed,” he said.
Locke's comments are a useful segue to an interesting aspect of the local view from the provincial government and its supporters. Locke certainly falls into that category and the similarity between his comments and those of the finance minister are striking. With that quote from The Muse in mind, take a look at this one from the release on the credit rating:
"Our economy remains strong and the current economic downturn should not affect development of new oilfields including White Rose Expansion, Hibernia South and Hebron," said Minister Kennedy.
The phrasing is similar, much like the similarity in early October between Locke's and the Premier's references within days of each other to the government being able to meet and exceed its current budget targets even if oil falls to $10 a barrel.
But what's more interesting in these two comments is that neither is completely true and in the wider context of Locke's comments on a bright future based on oil wealth, they constitute a fixation on oil as the source of economic salvation not seen in this province since "1979/80/81."
Let's deal with the projects first.
The White Rose expansion is a relatively modest project. With its development costs already recovered, oil would almost have to hit prices lower than the historic 1992 price of US$8 per barrel to make it economically dodgy.
The Hibernia South extension is also not a pricey project measured in terms of the original Hibernia project or Hebron. However, there is no development application yet and a decision to proceed would certainly be affected by oil prices significantly lower than the current ones.
In all likelihood, the project will go ahead given that the oil companies have at their doorstep a provincial government willing to invest hundreds of millions of very scarce tax dollars in the expansion since that ultimately lowers their cost. Given they will have recovered their initial costs by the time the new fields come online, their profit position would improve immensely in such a scenario while it would be the junior partner who would see a relatively lower return on investment. Low oil prices - especially below the foolish fixed price trigger of the current government's oil super-royalty regime - won't affect them as much as it would the new kid in the oil patch.
Hebron is the most costly of three projects and the one most likely to be affected by a long period of low prices. Analysts seem to agree that the current price climate makes investment in high cost ventures like offshore heavy oil, deep water projects and oils sands less attractive. Hebron's reported financial tipping point - US$35 per barrel - is well below that of an oil sands project but stop and look at current prices.
There's a reason why the companies insisted on a clause in the Hebron agreement which gave the partners - and the partners alone - the right to take up to a decade to sanction the project. Current Hebron timelines are merely works in progress, subject to revision is the financial climate changes.
The upside for Hebron is that the companies managed to secure several significant concessions from the provincial government as hedges against a drop in oil prices. Those concessions make it more likely the project will proceed.
First, they secured the decade to sanction with no penalty for deciding against proceeding. They have time to decide and there is no real cost for delaying if the numbers don't add up.
Second, they won the royalty concession that dropped the pre-payout royalty to a fixed 1% as opposed to the escalating scale of the old royalty regime. The energy minister herself heralded this as a major feature of the new deal.
Third, they were able to tie the super-royalty to a fixed price below which no extra cash was paid to the provincial treasury. By the government's own estimate, oil prices averaging US$50 a barrel over the life of the project produced less than half the royalties of a high oil price. Drop below that magic fixed trigger and the provincial share drops accordingly on top of the front-end royalty concession but from the company standpoint they can guarantee low possible costs across the board.
Fourthly, they secured significant fabrication concessions in the agreement. Most of the topsides work will be done outside the province anyway based on what appears to be a huge miscalculation by the provincial government's negotiating team.
On top of that, however, the management arrangement - including the provincial government as junior partner - would enable the companies to ship virtually all the topsides work and associated engineering outside the province in order to lower the costs and complete the project on time. If oil prices stayed low enough long enough and construction costs stayed high enough, it may well be worth the companies' while to pay the modest penalties for changes in the work commitments to get the deal done, even if they had to pay the penalties at all. A renegotiated contract arrangement with the provincial government's energy company and the government that changed the work commitments would likely never be made public under the revisions to the energy corporation act passed last spring.
The companies may well get their projects, but the return to the provincial treasury and the overall impact on the local economy may turn out to be far smaller than originally promised.
The fundamental problem in all this is the fixation on oil projects which has led the provincial government and its supporters to tie government finances to the price of a barrel of oil. Despite all assurances to the contrary, the next several years may be see provincial government fiscal problems as unprecedented as the surpluses of the past two or three years. Unlike those surpluses, however, the problems won't be figments of an accountant's bookkeeping methods.
Beyond that, prosperity for the province as a whole, in Locke's view, appears to be driven entirely by a couple of oil projects which, it must be noted, have a fixed life span. Neither Locke nor Kennedy - who echoed Locke's definition of prosperity - have not realized the folly of resting everything on the a very slippery commodity.
Oddly enough, it fell to Donna Stone, president of the St. John's Board of Trade to sound a very small warning bell against this very situation. Board of trade presidents are not known to buck the government line so her words stand out. As Stone told the Rotary Club of St. John's:
“This still gives us some cause for concern, however. Given the volatility of oil prices, the province should look at a long-term plan that will diversify our economy and make us less dependent on this ever-changing commodity,” Stone said.
Stone is absolutely right. Almost 20 years ago, the provincial government realized exactly that and implemented a broadly-based strategic economic plan to hedge against such dependence. That plan has been tossed aside in the past four years.
The consequences may prove to be dire and no amount of assurance that all is well will save us from the them.
Just remember what happened to Chip Diller.
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Based on the Telegram story Thursday by the always rock solid Moira Baird:
1. Development application submitted no later than December 2009. Obviously the project sanctioning decision will come before that based on the final project design and economic analysis.
2. Construction to commence 2012. That is pretty much in keeping with the timelines projected in August when the provincial government announced the final agreement.
3. First oil: 2017. Again that's pretty much on the timelines forecast already informally which had first oil somewhere around 2018.
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More than half the owners of small- and medium-sized businesses in Newfoundland and Labrador surveyed by the independent business federation believe the province will have stronger economic performance in the next 12 months.
Okay.
The federation's provincial director, Bradley George, says confidence is on the rise mainly because of the Hebron announcement last month that got the ball rolling on another major offshore oil development.
Stop and read that again.
Especially the last bit:
"Hebron announcement...that got the ball rolling on another major offshore oil development."
Really?
It did?
Boy, are they going to get a rude shock:
The Hebron project has not been sanctioned and may not be sanctioned, according to the fiscal agreement released on Thursday by the provincial government and only the oil companies can make a decision when - if at all - to develop the project.
That's a huge change in policy for a provincial government that, in the wake of the first Hebron negotiating failure only two years ago, was threatening to legislate development of projects offshore. The premier and others complained that development could be held up indefinitely by oil companies.
These people read need to read the fine print on these things.
Or at least Bond Papers.
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The Telegram front page today carries a story on the provincial government's revenue estimates for the Hebron project in three scenarios. The scenarios use oil at an assumed average price over the life of the project at US$50, US$87 and US$113 (constant 2008 dollars). The story is also available online.
Given that oil prices haven't averaged anything near US$87 or US$113 over the past 25 or 30 years, that US$50 a barrel estimate in constant dollars is probably a little closer to the likely performance of oil prices sometime after 2018. In that scenario, the provincial government estimates revenues at $6.8 billion, including $5.4 billion from the revised royalty regime.
That royalty regime keeps royalties at a constant 1% up to simple payout and then provides for an additional 6.5% in any month after simple payout in which prices average above US$50 for West Texas Intermediate at Cushing, Oklahoma.
To see the impact of oil prices on the revenue projections using the revamped royalty regime, all you have to do is lop one measly dollar off the assumed average price. At US$49 - a 2% drop from the government's assumed average price - the province's royalty take drops by at least $1.25 billion. That's 23% less. Factor in the loss from the changed royalty regime, which government estimates at $105 million at the average price of US$50 a barrel and the loss climbs.
The provincial estimates see the 4.9% equity position generating $800 million for the energy corporations oil subsidiary at the US$50 price assumption. This appears to be based on total costs for the company of $600 million over the life of the project (construction to decommissioning).
Based on the provincial government's own estimates of costs for acquisition and the construction phase, that would assume the OilCo's share of all production and decommissioning phase costs at $200 million. That works out to a total projected cost of $4.0 billion for ongoing operations of the rig, exploration, delineation and production drilling after first oil and whatever share of decommissioning costs the oil company will bear. It would also have to include any fees and charges for handling the sale of crude which represents the OilCo share of production.
Low-balled costs? Could be. Bond Papers' preliminary estimate of lifecycle costs for OilCo came in at about twice the amount apparently used in the provincial government calculations. Bond Papers used a figure of $10 billion as the cost of operations expenditures and production phase drilling, and decommissioning costs, including the $250 million for a liability guarantee.
Fixing an accurate estimate of the costs after first oil would help refine the calculations. That may be difficult, though, since the acquisition agreement between the provincial government and the oil companies hasn't been released to the public. It might become somewhat easier when and if a development application is filed with the offshore regulatory board. That application would include a forecast of drilling activity for the production phase.
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Related:
The directors of the Oil and Gas Corporation of Newfoundland and Labrador (OilCo) include some familiar names from the energy corporation board, one of the Premier's former law partner and the head of the Steele Communications.
John Ottenheimer is a former provincial cabinet minister currently serving as chair of the board for the province's energy corporation and its Hydro subsidiary.
Fellow board member Ken Marshall - the Rogers Cable boss in the province and a former business partner of the Premier - also sites on the new OilCo board, along with Gerry Shortall, a former Hydro board member appointed by the Williams administration.
Glen Roebothan is a senior partner with Roebothan, McKay and Marshall, the Premier's former law firm.
John Steele is the surprise. He's the head of Steele Communications, parent corporation of VOCM.
OilCo was incorporated in August 21 under the Corporations Act as a subsidiary of the provincially-owned energy corporation.
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The Hebron project has not been sanctioned and may not be sanctioned, according to the fiscal agreement released on Thursday by the provincial government and only the oil companies can make a decision when - if at all - to develop the project.
That's a huge change in policy for a provincial government that, in the wake of the first Hebron negotiating failure only two years ago, was threatening to legislate development of projects offshore. The premier and others complained that development could be held up indefinitely by oil companies.
Under the fiscal agreement, the proponents are under no obligation to proceed with the project or any project and that choice remains the sole discretion of the proponents.
2.3 Project Sanction Obligations.
The entering into of this Agreement does not obligate the Proponents to sanction or continue the Hebron Project or any other Development Project, which shall be in the sole discretion of the Proponents.
On top of that, the proponents have at least a decade to decide to sanction the project before the provincial government may terminate the agreements signed this month. However, as with the rest of the agreement that minimum 10 year life span of the agreement could be continued by agreement among the companies and the provincial government.
2.4 Time Limit for Development.
If, at any time after the tenth anniversary of the Effective Date, the Proponents have not obtained approval from the Board of the Development Plan, absent agreement to the contrary the Province shall have the right to terminate this Agreement on thirty (30) days notice.
While the provincial government released the acknowledgement agreement, the fiscal agreement and the benefit agreement, it withheld two other key agreements. One is the closing agreement. The other is the acquisition agreement which presumably covers details of the provincial government's equity interest in the project.
In addition to the points noted above, the fiscal agreement appears to involve a more substantive change to the royalty regime than originally disclosed. There'll be more on the fiscal arrangements and the benefits agreement once your humble e-scribbler has had a chance to go through them in detail.
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The federal government has scrapped plans to build three large supply and support vessels for the navy, saying the bids from two contending contractors were too high.
The shipyard at Marystown was part of one bidding consortium.
While some topsides fabrication for the Hebron project may go to Marystown, the modules likely to be built in the province are small and no where near as lucrative as the $3.0 billion Joint Support Ship contract.
The provincial government seemed to be signaling something was up two weeks ago when the Bull Arm fabrication site - soon to become a subsidiary of the Energy Corporation - demanded immediate return of two large towers even though Bull Arm has no use for them in the foreseeable future.
Concern in Marystown led to a meeting between town leaders and energy minister Kathy Dunderdale that appeared to quiet the matter.
Dunderdale used the Hebron project to threaten the shipyard and the community over the towers. She said that the reluctance to return the fabrication stair towers from Marystown to Bull Arm would damage the Hebron negotiations and the prospect of future work. She made no effort to explain how the two might be linked, especially considering that the provincial government is a partner in the Hebron project and that its Bull Arm facility was the only site in the province where the gravity base structure could be built.
Dunderdale also likely knew at the time of the public fracas that construction at Bull Arm for the Hebron gravity base would not begin until sometime after 2012. One oil industry official told news media last week that concrete pours wouldn't begin at Bull Arm until 2013 or 2014.
The towers were originally built at Bull Arm for the Hibernia project at a cost of $8 million dollars. They were used at Bull Arm during outfitting of the Terra Nova floating production and storage vessel (FPSO) and by Marystown on the White Rose project's FPSO.
The Marystown yard is currently bidding on a refit of the Terra Nova FPSO. Bull Arm is apparently also bidding on the work.
In early August, community leaders noted that the government-owned Bull arm site already enjoyed a competitive advantage over the privately-owned Marystown shipyard. Marystown deputy Mayor Julie Mitchell:
suggested should Bull Arm need the infrastructure for a project, the matter might be different but, as of the moment the facility doesn't need the towers.
As it stands, she said companies who lease the Bull Arm site from government already have an unfair advantage over Kiewit when bidding for contracts. They don't have overhead costs, pay only a nominal rental fee and can walk away when the project is complete.
Kiewit has a bid placed on an upcoming Terra Nova project, with other companies that could potentially use the Bull Arm site also said to be in the running.
This week the provincial government also announced plans to convert the Bull Arm corporation into a subsidiary of the Crown-owned energy corporation. As such, Bull Arm will continue to enjoy significant cost and tax advantages over its private sector competitors while at the same time being entirely exempt from the public tender act. It will also enjoy inside connections to the Hebron, Terra Nova, White Rose and Hibernia projects through the energy corporations work on White Rose and Hebron.
The Bull Arm company will be shielded from the province's open records laws under changes made to the energy corporation act in the spring sitting of the legislature.
In the House of Assembly last spring, Dunderdale used the prospect of other construction work - evidently including the JSS contract - to dismiss concerns about how much Hebron work would actually be done in the province once the deal was signed:
MS DUNDERDALE: Mr. Speaker, we are on the cusp of such development in this Province that we have never seen before in our history. We have a number of potential projects lined up here. Any one of them, any one of those projects, will fill up just about every bit of capacity we have in this Province.
As Bond Papers noted, government negotiators appeared to have operated under the mistaken assumption that major construction work in the province was all but guaranteed and that industrial capacity would be fully utilized. That would explain why last week's announcement of the final Hebron deal set minimums for local work rather than include the initial insistence that all work that could be done in the province would be done here.
The cancellation of the JSS contract follows on the failure of the NLRC second refinery proposal in June. The company is seeking investors for its failed bid and is currently operating under bankruptcy protection. A proposed natural gas terminal in Placentia Bay remains a proposal and the prospects of a Lower Churchill development are limited.
Of the projects to which Dunderdale referred, only the Vale Inco smelter-refinery at Long Harbour appears to be firm. Premier Danny Williams and Dunderdale jetted to Brazil last November to meet with Vale Inco officials about the project.
Under the company's development agreement with the former Grimes administration, Vale Inco is contractually bound to build a smelter-refinery in the province.
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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:
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From the Friday Telegram, two examples of completely loopy comments, namely ones unsupported by fact.
First, the editorial on Hebron which states:
And because the province holds an equity position in Hebron, it will also have the chance to develop expertise in running an oilfield, which means employees won't only be welders and heavy-equipment operators, but will be managers, designers and engineers, too.
Now since the Telly-torialist has been following this project, he or she is aware that the equity interest in the project includes absolutely no management rights; that is, there are no decision-making rights involved.
If that weren't enough, the managers, designers and engineers will not be employed by the provincial government's Ener Corp subsidiary. The managers, designers and engineers are employed by the major players or the private sector contractors doing the work.
And if even all that weren't true, the Telly-torialist need only have read a news story which moved late yesterday afternoon and which is a front page story in the print edition of the Friday paper:
The ink has barely dried on the Hebron deal and a change of operators is taking place - ExxonMobil Canada will be the new lead partner among the five companies developing the oilfield.
Managing Hebron is not going to be a job rotating among the interest holders.
Nope.
Chevron was doing that job.
As of yesterday, ExxonMobil is slipping into the lead.
Second, there's a column by Brian Jones, one of the Telly's editors:
The province's political culture has also evolved, along with people's taste in wheels. The offshore oil debate used to revolve around royalties, a word seldom used by politicians in the 1990s. Despite lacklustre leadership, people became aware of the fact that, as owners, the public deserved a better share of offshore oil revenue.
Wednesday's Hebron announcement revealed that the provincial government will rake in about $28 billion, via royalties, taxes and profits.
The government will rake in $28 billion.
No question.
Definitely.
The problem for Jones is that, as he well knows, the $28 billion figure is based on the assumption that from 2018 until the last drop of oil is drained from Hebron, the price of a barrel of oil will average US$115.
With that kind of writing, Pollyanna must be on suicide watch.
Brian needs to check on both the average price of oil over the past 25 years and the typical price of a barrel. Let's just say that the number you come up with in either case is nowhere near one hundred and fifteen bucks.
Perhaps he is thinking the world price of oil will be expressed in Weimar marks or Zimbabwe dollars, the latter of which has been valued against the American dollar at exchange rates that make the thing literally not worth the paper its printed on.
Such unsubstantiated commentary.
We really haven't had that spirit here since 1969.
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