Terra Nova field production halted for up to two years #nlpoli

No one should be surprised that the partners in the Terra Nova field are planning to lay up the production platform and will likely stop production from the field until 2022.

There are five perspectives we can bring to bear on this one event.

FPSO:  The pandemic knocked the planned refit of the Floating Production Storage and Offloading platform off schedule for 2020 anyway.  The operators needed to lay the ship alongside until a yard opened that could do the work.

Field:  There’s no sense in selling off a highly valuable asset very cheaply if you don’t need to do so.

The glut of oil and the downturn in policies make it sensible to shut down production from the field.

Terra Nova oil is light and sweet.  It is cheap to produce and easy to refine. With the FPSO paid off long ago, the Terra Nova operators can leave the very profitable field in storage until prices rebound and deliver the kind of higher profits that the field can generate.   

GNL:  The provincial government will take a serious financial hit with Terra Nova out of production for a couple of years.  But, as with the company perspective, it’s actually in the public’s long-term interest to leave the highly profitable oil in the ground rather than sell it off cheaply.

Provincial society and politics: Unfortunately, 15 years of using public money to buy political favour has produced a situation in Newfoundland and Labrador that is much like the one in Venezuela. So many groups across the whole of society are so addicted to public spending that they will treat this smart and understandable move as a catastrophe.

Expect calls for federal welfare for oil companies to become louder along with renewed demands for a federal bailout of the provincial government.

Federal Government:   The federal government will provide some financial assistance to governments, companies, and individuals across Canada to deal with the pandemic, but it has neither the political will nor the financial muscle to bailout oil companies and provincial governments.  There is no support for such moves at the bureaucratic level nor is there any support for bailouts at the political level either.

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North Amethyst pumps first oil

A few things to note about the news that the White Rose extension field – called North Amethyst – pumped its first oil this week;

1. It took only four years to go from discovery to production. reducing the time from discovery to production is huge for the future of the offshore industry.
2. Tiebacks.  Expect to see more of them as Terra Nova dries out, for example.  Floating platforms are the most cost-effective way to exploit the numerous small fields that have already been discovered offshore. The gang at Terra Nova and eventually at White Rose can just float their hulls around, hook up to underwater pipes and pump the crude cheaply, efficiently and in a way that should be as environmentally sound as oil production can be.
3. An established royalty regime is a key part of promoting development.  That’s what worked for this deal and helped speed up development. Thankfully, while the 2007 energy plan called for a complete overall of the royalty regime, the generic regime is still in place.  Given the rate the current crowd do things, we wouldn’t see a royalty regime to replace the current one for decades.  As it is, the existing, pre-2003 royalty regimes – not the Old Man’s tweaks – are producing the lion’s share of offshore cash these days.

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When all they can offer is an E.A., Terra Nova version

Said it before.

Say it again.

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Offshore royalty audits “Behind, big time”: Dunderdale

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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Husky to expand Terra Nova presence

From Oil Week:

Husky Energy Ltd. (TSX:HSE) plans an active year of expansions and acquisitions, from bumping up its stake in the offshore Terra Nova project, to increasing upgrader and refinery capacity, the oil and gas producer said Thursday.

Husky, which held its annual shareholders meeting in Calgary on Thursday, said it would be growing its ownership stake in the offshore Newfoundland project by increasing its working interest in developing fields, rather than buying other partners‘ portions.