When small could mean big

As renewNewEngland.com reports, the Maine state legislature recently passed an initiative designed to encourage small, locally-owned green energy generation concepts. The bill was signed into law on June 26.

The new law establishes a six-year pilot program to encourage the development of community-based renewable energy in Maine, defined as a majority locally-owned facility that generates electricity from an eligible renewable resource.  The pilot program has an overall program cap of 50 MW, 10 MW of which is reserved at the outset for projects that have a generating capacity under 100 kW or are located in the service territory of a consumer-owned utility.  To be eligible for the program, renewable energy projects must (1) have a generating capacity of 10 MW or less, (2) secure a resolution of support from their local community (projects with a capacity of less than 100 kW are exempt from this requirement), (3) be connected to the grid, and (4) have an in-service date of September 1, 2009 or later.

This has all the hallmarks of a growing trend south of the border to focus on private sector development of small energy developments.  It’s based on the belief – apparently -  that small is not only less harmful to the environment but that local initiative and local capital can successfully combine to meet a portion of the nation’s energy needs.  The approach is supposed to create jobs and, since it is handled by the private sector and costs are relatively small, stimulate the growth of local businesses.

Compare that to the official philosophy in Newfoundland and Labrador that is touting an energy megaproject that thus far has no customers outside the northeast Avalon peninsula.  Incidentally, even your humble e-scribbler’s sister missed the point that the infeed the provincial government is trying to ram through Gros Morne is designed to bring power to townies, not Yanks. 

There is no plan in public at this point to extend any power lines south of the island of Newfoundland.  There likely won’t be if customers can’t be found for the juice.  Anyone who has read any part of the environmental review documents for the infeed to Soldiers Pond will understand that the thing is justified entirely on a supposed power shortfall on the island within the next decade. 

They plan to meet that supposed need with Lower Churchill power at a cost of $6.0 to $9.0 billion.  As the 2007  energy plan puts it:

This demand is forecast to grow at a fairly steady, moderate pace over the next several years. This would result in a need for new sources of supply on the Island prior to 2015, and later in Labrador.  As a result, we plan to develop the Lower Churchill project, which will include  a transmission link between Labrador and the Island.

Anyone reading the environmental impact documents will also realise that the provincial government’s energy company has effectively ignored the potential for small hydro developments or other small electricity projects to meet local need.  Even when an energy corporation official talks about wind power, it is obvious the corporation is fixated on the export market.  And when they think exports, big is all they seem to see.

There’s been a moratorium on small hydro projects in the province since the late 1990s.  While the provincial government committed two years ago to make a decision on the moratorium this year, odds are the decision won’t be made on time.  Even if it is made, the energy plan links the Lower Churchill and alternative sources for the island in an “either/or” proposition.  If the government proceeds with the Lower Churchill, alternatives are dead issues.  If the Lower Churchill dies, then small generators are the way to go.

As for private sector capital investment,  you only have to consider that one of the effects of the expropriation bill last December to see the official attitude to the private sector.  While everyone fixated on Abitibi, the expropriation also included seizing control of just exactly the kinds of small hydro that Maine and others are encouraging and hand them over to the provincial government’s energy corporation.  Star Lake  - totally unrelated to the Abitibi mill - was one of the casualties of the expropriation, as was the Exploits River partnership, a joint venture between Abitibi and locally-based Fortis. 

If that doesn’t convince you, consider that in the event small hydro projects go ahead, the energy plans mandates that only the provincial government energy corporation will be involved:

If the Provincial Government lifts the moratorium, 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.

And it’s not like the energy corporation has been very efficient at exploring alternatives to its current obsession with megaprojects.  The earliest proposals for wind energy farms on the island turned up over a decade ago. However, it took another six years for a small project to start on an isolated island and another  seven years for a report to examine the issues involved in wind generation and another two years after that before the first larger demonstration project started.

If Newfoundland and Labrador followed the approach of other jurisdictions, the people of the province could reaping the big economic and environmental benefits of innovative, small energy generation.

Unfortunately, the provincial government’s energy plan is fixated on government monopoly and megaprojects. The only things big in that are costs and - of course - project delays.

The Lower Churchill was supposed to start in 2009.  By the latest estimates, the earliest it could start construction is after 2011.

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Lack of royalty regime hampers further oil development

Not surprisingly, some people attending the NOIA conference in St. John’s are wondering what is next on the horizon.

As CBC reports, there is much talk of developing smaller fields in the Jeanne d’Arc basin.

There is also the recent announcement by StatoilHydro of a significant oil find at its Mizzen property, farther offshore than the three existing projects and Hibernia South and Hebron both under development.

Regardless of its size, Mizzen poses a number of challenges, not the least of which is the cost and technical issues of developing a field – even one of upwards of three billion barrels of oil – in deep water.

There are at least two others.

One is the impact of the United Nations Convention on the Law of the Sea (UNCLOS). Mizzen is well outside the 200 mile exclusive economic zone but may not lie outside the definition of the continental shelf.   If this is the case, the coastal state – namely Canada – would be required to set aside a portion of the revenue (maximum seven percent) from any development for distribution to the other states which are party to the convention.

Article 82

…

2. The payments and contributions shall be made annually with respect to all production at a site after the first five years of production at that site. For the sixth year, the rate of payment or contribution shall be 1 per cent of the value or volume of production at the site. The rate shall increase by 1 per cent for each subsequent year until the twelfth year and shall remain at 7 per cent thereafter. Production does not include resources used in connection with exploitation.

That’s potentially a significant cost to both Newfoundland and Labrador and to the companies.

That links to the other problem, namely the absence of an oil or gas royalty regime in the province.  Hibernia, Terra Nova, White Rose and Hebron all have royalty regimes.

The 2007 energy plan wiped out the existing generic oil regime. While the plan promised to replace it and issue a new gas regime, neither has emerged in the intervening years. There is no sign of either coming in the near future.

Even the development of smaller fields on the Jeanne d’Arc basin not associated with the existing projects is affected by the lack of a royalty regime.  The Hibernia South agreement is proposed using the Hibernia royalty regime developed in 1990 and amended in 2000, with some minor amendments.  Other projects would not have that as a basis, nor would it have the Terra Nova, the generic regime used at White Rose or the amended generic regime used for Hebron.

As Danny Williams said in 2005, oil companies don’t like risk.  Really though it isn’t that they dislike risk as much as they prefer predictability.  Even a volatile political climate is manageable, but when it comes to money, the companies like to have a good picture of what their costs will look like over time. That’s where an established royalty regime comes in handy.

In the meantime, some exploration will continue.  Seismic is pretty straightforward.  But when it comes to drilling holes and maybe looking at production, the lack of a predictable financial regime tends to make oil companies skittish.

The situation today is much the same as it was three or four years ago.  There are more exploration and development prospects for Big Oil than there is available capital.  They will put their money where they can figure out the financials.  Anything they can’t calculate  at all will go to the bottom of the pile in favour something somewhere else, even in a part of the world where the politicians in charge change with the sound of gunfire.

Now that Hebron and Hibernia South are pretty much done, the provincial government should turn its attention to restoring stability in the offshore financial regimes.

Above all else, that is what will determine the location of the next project or if there is a project at all.

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NB Premier: Not so fast, there Danny boy

New Brunswick premier Shawn Graham issued a warning to Rodney and Danny about any plans they might have for energy development involving his province:

Premier Shawn Graham sent a shot across the bows of his Atlantic Canadian counterparts Tuesday, saying the other three provinces cannot simply expect to build new energy projects and then ship the electrical power to the United States through New Brunswick's power grid.

Then he made it plain:

For example, he [federal defence minister Peter MacKay] pointed to Newfoundland and Labrador's hydro projects at Lower Churchill Falls.

The Newfoundland government's hydro corporation is currently in negotiations with several utilities in the Maritimes, discussing the possibility of bringing that electricity to the region via sub-sea cable.

Not so fast, Graham said Tuesday.

The premier, at an event in Toronto promoting his tax reforms, said he was "surprised" by MacKay's comments.

While Graham said he will co-operate with Ottawa and the other provinces, he warned that New Brunswick won't be taken advantage of or pushed aside.

In a follow-up interview, he went further.

"That energy has the potential to flow through our province, but we want to make sure it doesn't jeopardize the projects that we're trying to achieve here," he said.

"The marker that we're putting in the ground is: we're not just going to (allow) the erection of lines for electricity transmission in New Brunswick that benefit other regions, but not (us)."

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No Lower Churchill in Nova Scotia Green Plan

Two things to note from the release of Nova Scotia’s green plan for energy conservation:

1.  Talk is cheap, again:  They actually have a plan, unlike Newfoundland and Labrador.

One was promised in 2005 but so far – and in keeping with the inability of this administration to do anything in a timely way – no details haven’t emerged that actually create meaningful targets for anything.

2.  Contrary to the sentence in the Chronicle-Herald’s coverage, there is no reference to the Lower Churchill in the plan itself.

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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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The ghost in the turbines

The Telegram makes an interesting observation in its Thursday editorial on the energy plan:

How refreshing it is to hear a government making plans that consider a time that they might not be in office, as well as the time that they are;

to have a government looking at the long-term needs of the province, as well as addressing the sort of short-term needs that get governments re-elected.

How refreshing indeed, although it's doubtful Telly publisher Miller Ayre would acknowledge the most significant approach of the type. That would be Challenge and change, the province's strategic economic plan issued in 1992. It laid the groundwork for much of the economic success of recent times.

Challenge and change marked the first time in the province's history any administration had adopted a comprehensive plan to guide development well after the administration that implemented it had left office. The 1992 SEP was so successful that it has survived through every subsequent administration. The Progressive Conservative's 2003 Blue Book even contains a precis of the SEP as one of its chapters.

The Telegram editorial also endorses the energy plan's assumption for continuing high oil prices, saying "[a]ll in all, any forward-looking plan has to operate with some inherent assumptions, and a continuing high price of oil is probably a better bet than anything else."

A better bet than anything else? There's a highly debatable point and an odd conclusion given that the editorial also notes that the infamous Churchill Falls contract contained a low price assumption that proved wrong.

In the case of Churchill Falls, the assumption was that electricity supply would keep power prices low. A huge and unexpected upsurge in demand, when increased oil prices suddenly meant home-heating with electricity was more economical than fuel oil, blew those assumptions right out of the water.

The old Telegram editorialist four decades ago took a decidedly more cautious view of that agreement. Here's a sample of thinking at the time, in the form of a scan of one editorial. Click on it to enlarge the picture. You should be able to pick out the last two paragraphs.

Great promises of revenues to the provincial treasury all without a shred of paper or any detail to demonstrate how it would work. A call for the legislature to be opened to debate the deal and see what the deal between BRINCO and Hydro Quebec looked like.

Interesting that 40 odd years later, another editorial team was willing to take an administration's word for the riches to come, but with the knowledge of the earlier circumstance.

As much as we've decried the use of Churchill Falls as justification for just about anything in this province, it's a bit hard to avoid it in this case: the Telegram invoked the spectres in the turbines and then ignored the rattle of their chains.

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Beating yourself to the punch

So how is it Danny Williams started on a national energy plan two years after starting the provincial one and he still finished the national one first?

Does anyone else find that just a wee bit unusual?

It's not like there wasn't already seven years work invested in the provincial plan or anything.

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Energy plan as political plan

Looking at the Globe and Mail story on the Newfoundland and Labrador energy plan, it gets easy to see just how out of touch the Globe is with what's going on outside some very narrow confines.

There isn't anything in the story that qualifies as news.

For example, the provincial government has been saying for some time what local politicos have been figuring, namely that the energy plan will be a key part of the Williams administration's nationalist platform for the fall general election.

The energy plan isn't about economic development any more. It's about politics.

That's the news in the piece, but the Globe seems to have missed it.

The energy plan will be framed as a battle between Newfoundland and Labrador and Big Oil. It will be about hanging tough and looking for what is "reasonable."

Dunderdale merely repeated to the Globe what Danny Williams has already said: Big Oil better come back to the table because once the energy plan is released, the oil companies will have to pay a lot more than they would have a couple of years ago.

It's talking smack and talking tough for domestic political consumption.

But as both Williams and Dunderdale both know already, the oil industry is taking the view expressed by Paul Barnes local manager for the petroleum producers association in the Globe piece. Equity is fine if the provincial government wants to farm in and shoulder the costs - a la Statoil and Norsk Hydro - but anything else is likely to discourage outside investment.

Predictable positions on both sides. It really doesn't matter which one is right. The energy plan is now pure politics. Pure talk.

Take, for example, the Globe referring to the tough document that will demand "at least" a 5% equity position in all future oil and gas projects in the province. By some comparisons, five percent is actually pretty small, and that's likely why the number is being tossed out there: it sounds innocuous.

But, the Globe needs to do its homework.

The real number is likely to be 10%. Word from the oil patch and other places has it that the draft natural gas royalty regime has already been handed back to the provincial government with the polite advice that the government's plans would scare away investment. That's because the 10% equity position would come on top of the considerable share of cash flows the provincial government already receives.

The chart at right shows relative shares of cash flows for the local offshore, as presented by MUN economist Wade Locke in a public presentation last fall.

All things considered, it gets fairly obvious that the Great Battle Against the Foreign Demons of 2007 isn't really the same battle of 25 years ago.

What we are talking about today are fairly fine shifts of cash that look tiny. However, those fine adjustments of cash may tip the very sensitive investment balance against exploration investment in the local oil patch for some period of time.

If the equity demand will be applied to every new development, as the Globe reports, then we may also see impacts on existing significant discoveries. Hebron is already off the table until sometime in the next decade. Hibernia South: ditto.

Small developments like Norsk Hydro's West Bonne Bay would also be affected, especially if the results of Norsk Hydro's exploration program on the field shows oil reserves are much larger than current estimates.

Even White Rose would fall under that sort of requirement. Husky Energy has been working hard to cultivate a strong, positive relationship with the Premier. However, if White Rose turns out to be larger than currently estimated, that is, if there is an opportunity for the province to get more, then that relationship could change dramatically.

Delaying those developments aren't really important as the energy plan morphs into a political document. The government's real issues are bigger and look ahead over longer time spans.

The new energy corporation is likely to become the focus of export energy developments, some of which are tied to oil and gas. It wouldn't be surprising, given the corporation's mandate, to see it take control of the Lower Churchill project which may be generating power before the middle of the next decade. Part of that project will likely be the construction of the transmission infrastructure - sub-sea cabling - that would carry electricity to markets in the United States.

The new energy corp might well be the license holder at the end of the bid for Labrador parcels next year. With some exploration work - potentially carried on by the energy corporation on its own - the natural gas available from the Gudrid, North Bjarni and Bjarni fields could double in size. That gas, as much as eight trillion cubic feet (8 tcf) including the three existing significant discoveries, could be brought ashore and used to generate electricity in a new facility on the coast of Labrador. The power would be sold down the Lower Churchill lines to markets in the United States.

None of that would really be affected by the equity issue.

That bit on the energy corporation is speculative, of course, but it certainly fits with public statements by provincial officials. It also fits the Premier's concern about shipping natural gas directly to market without some form of added local value.

All of these plays or possible plays are well in the future, of course. In the short- to medium- term, the provincial government knows that it will have significant cash flows from existing oil production. There's no risk in the rhetoric. There may not be an economic gain either, even in the longer run, but the energy plan is increasing something other than economic development.

There really isn't any risk for the provincial government in using part of the energy plan for political purposes. Whatever consequences come will come so far in the future as to be irrelevant to any of the politicians currently making decisions or likely to make decisions on these issues over the next decade.

But to give credit where credit is due, the provincial government's posturing on oil and gas - with all the distortions and misrepresentations about revenues to date and who makes what - is a masterful example of framing a discussion in a way that can't be counteracted simply by anyone, political or industrial.

It will produce the political effect desired in October.

As a political plan, the energy document is already working its magic.

As an economic plan?

Well, that remains to be seen.

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Then there's the Big Oil thing...

From the Financial Post, another article by Calgary bureau chief Claudia Cattaneo based in part on her recent trip to the province:

Yet what is becoming increasingly obvious is that control of Newfoundland's future is slipping into the hands of Alberta, largely because of Mr. Williams' unrealistic expectations and the market's dispassionate behaviour.

Canada's two top oil-producing economies are developing such a strong symmetry they are becoming either/or situations in a skills-challenged reality, to the point it may take a big downturn in Alberta for Newfoundland to get a shot at benefiting from its offshore riches in the future.

[Paragraphing added for clarity] Three reasons: - Oil is badly needed, but labour and brains to produce it are now needed even more. Newfoundland's people and oil services companies are moving to Alberta in large numbers. The exodus is so large that Newfoundland's business community fears the province no longer has the workforce to build a new project, even if one were announced tomorrow. It also worries it cannot compete with Alberta wages, making any attempt to lure its people back futile.

Cattaneo offers an assessment of the proposed energy plan, based as much as anything else on feedback she got from the local business community and what she is hearing from the oil companies. An equity stake for the provincial government's Hydro corporation, a high level of local investment by oil companies and a super-royalty regime.

She's also comparing the local policy approach to the Alberta one and the contrast is striking:

In addition, the fiscal terms would make Newfoundland uncompetitive with Alberta, where the government has not owned a piece of the oil industry since it sold Alberta Energy Co. (the predecessor of EnCana Corp.) 20 years ago; its royalty rates, while under review, do not escalate with higher commodity prices; and there is no requirement to invest locally, other than a preference by the government to keep as much heavy oil upgrading in the province as possible.

[Paragraphing added for clarity] - Most companies with interests in Newfoundland's offshore now have ambitious oil sands plans. In fact, those plans have escalated since Hebron talks failed, making a return to the East Coast a hard task: ExxonMobil Corp. is a partner in the Kearl Lake project and has taken a larger role in the management of the Syncrude mining consortium; Petro-Canada is priming its Fort Hills project for takeoff in the summer; Chevron Corp. is a partner in the Athabasca Oil Sands Project, which is expanding aggressively; ConocoPhillips has its hands full with a major oilsands partnership with EnCana and interests in two other oilsands projects; Husky Energy Inc. just bought a major refinery in the United States as part of its own oilsands strategy. Even Norsk Hydro, the Norwegian oil company that has been taken over by Statoil ASA, made a big leap in the oilsands two weeks ago when it purchased North American Oil Sands Corp. and now plans to become one of its largest operators.

The energy plan may be released by June. Then again, if past patterns hold, the plan will be pushed off by one or another crisis in government or by another project that is ahead of it in the serial government pipeline.

If Cattaneo's assessment is correct - and local chatter suggests the oil companies have already squawked about the revised royalty regimes - then expect the plan to be pushed off until the fall election.

Then it will become the centrepiece of the Autonomy Campaign. With the controversy it will surely generate, the government Progressive Conservatives will contrast their approach with those they will undoubtedly accuse of caving in to Big Oil and possessing the weakest of weak knees.

The caricature of Hugo Chavez will be readily apparent to those who see it. The Premier will point to his relationship with Husky as evidence he isn't all that bad. maybe he's right, but then again, Husky won't be affected by the energy plan the way other companies - the ones with new projects - would be as they look to invest in offshore oil and gas. Newfoundland and Labrador needs capital to develop the offshore, but that isn't as important as the need for political capital that comes from creating foreign demons that must be fought for the good of the local collective.

All great political theatre.

It just won't matter for the development of a local oil industry.

The energy plan would have then become a tool for politics, not a tool for long-term economic development, just as with virtually every previous administration and every other major economic prospect.

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