Bay du Nord and Equity #nlpoli

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

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

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

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

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

No equity? No surprise. #nlpoli

It didn’t take long for Paul Davis to get the comparison he was looking for last week.

The Telegram - not surprisingly – offered it up in the editorial on June 17:

“Premier Paul Davis pulled a Danny Williams Tuesday,”  the editorialist wrote.

Davis told the annual NOIA oil and gas industry conference that a deal to develop Bay du Nord was mere weeks away.  Never mind the complexity of the project:  500 kilometres offshore,  in very deep water,  very deep under ground.  Never mind the complexities of international law not fully resolved yet.  Never mind the project economics – whether it can be developed profitably -  are still unknown.

Never mind anything.

The goal was the comparison.

Danny Williams and the Philosopher’s Stone: Control and Resources

“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.

Control in the Energy Plan

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.

-srbp-

Equity

The people of Newfoundland and Labrador have been hearing a lot about equity these past few years.

They’ve been hearing about it just recently from the fellow who likes to call himself the Leader of the Province. 

He mentioned it a few times within the past couple of weeks when he announced another offshore oil deal.  He was talking about equity as in shares in a business, as in the Government of Newfoundland and Labrador running a small oil company.

Listening to fisheries minister Tom Hedderson last week on CBC Radio’s Fisheries Broadcast, people in the fishing industry likely had another meaning of equity in mind.

Hedderson told listeners that the provincial government was prepared to help out the thousands of  people  - the “workers” - affected by the crisis in that industry. They’d help, at some undefined point in the future, maybe,  with some way of bridging people onto employment insurance.  The provincial government would find a way to stamp them up, but only if necessary and at this point while things were bad, the point of necessity didn’t appear to be there just yet.  Well, certainly, to paraphrase Hedderson, no one had come to government with the documentation to show them conclusively of the necessity at this point. 

And what’s more, anything else for the industry, well that would be a subsidy and subsidies were not the way to go, according to Hedderson.

The Premier said much the same thing last week, via another medium.

No subsidies. 

No “investments”.

Only make-work and then EI.

If necessary.

That’s where the other meaning of equity likely came in for a host of people.  The “equity” they were thinking of was equity meaning fairness,  equity meaning to treat like things alike.

The Telegram editorial on Thursday talks about some of the things people across the province have noticed.

The paper workers [at Corner brook Pulp and paper] got a full-court ministerial press: the moment the 130 layoffs were announced, not only Premier Danny Williams, but Natural Resources Minister Kathy Dunderdale, Human Resources Minister Susan Sullivan and Justice Minister Tom Marshall were all on the plane to meet with the workers' union that very afternoon. Heck, the news release had the names of a record-breaking five separate media staffers to contact on the bottom.

Not so with fisheries workers. When fisheries workers occupied a government building in St. John's on Monday, Williams was in Europe on what is arguably a mission with only limited possibilities for demonstrable success. (Williams is talking to European Union officials about the already-done-deal of the EU seal ban, and about Canada-EU trade negotiations, where the EU has already said they deal with national governments, not individual regional ones.)

Fisheries Minister Tom Hedderson was in Houston, and the only minister available to meet with the group was Kathy Dunderdale - but she'd only meet with the group if they agreed first to leave the building.

That's a very different response for workers in a very similar circumstance.

The Telegram calls it a double standard.

That would be treating likes things differently.

They are right.

That’s not equity.

It is in the inequity of its own policies - the real or perceived lack of fairness - that the provincial government finds the root of its current political problems with the fishery.

And offering to stamp people up, in place of “investments”, and only maybe, at some undefined point in the future, if necessary?

Some might call that iniquity.

-srbp-

White Rose observations

The provincial government and the White Rose partners revealed some further detail of the White Rose expansion project on Monday.

Some observations/questions:

1. The bulk of the financial return to the provincial treasury is from the old generic royalty regime established in 1996.

2. There is no real discussion of the "equity ownership" and what it means.

With the exception of a few general references, there is no discussion at all of what is entailed in the "equity". There is no discussion of acquisition costs or other liabilities associated with it, nor is there any discussion of what - if any - management rights accrue to the energy corporation our of this stake.

There is a reference to a processing fee on "its", i.e. the energy corporation's, oil but no indication of what that means in general terms.

3. What is the "processing fee" for?

Under the agreement, the province’s energy corporation will pay a ‘processing fee’ of $3.50 a barrel on its oil.

This is essentially a fee to ensure processing capacity on the Sea Rose FPSO.

The floating production, storage and offloading vessel for the project has the capacity to handle production from the field at the approved rates. It can store and process at established rates. There is no obvious reason for the provincial government to pay a set fee per barrel to ensure capacity exists.

If this fee is one applied to all operators, then this is an operating cost, not a cost related to acquisition of an equity interest, it has been presented.

If it is an operating cost, it certainly isn't clear if the fee represents the total energy corporation share of operations or if it is a specific amount related to a certain aspect of operations. A "processing fee" of this type is sometimes applied on leased FPSOs where the vessel owner is actually reimbursed a lease rate and an additional amount for processing from the company renting the platform.

The fee may be related to a process of "deeming" what part of production belongs to the provincial government, even though the production is co-mingled with the total production. That appears to be the case, given the implication of the next sentence in the backgrounder: "To get the crude to market, there are a number of marketing arrangements already in place with existing facilities, and the province’s energy corporation will be able to tap into those."

Essentially, the energy corporation would receive the value of a quantity of oil less operating, capital and any other costs rather than receive a specific quantity of oil that it could then take to a refinery and market directly. The quantity of oil would be "deemed" or established based on a set of accounting rules.

There's nothing unusual or necessarily problematic about such an arrangement; it would just mean that the energy corporation could not necessarily load up a series of tankers and move the crude to a refinery of its choice.

So what is the fee really all about and what other fees and charges are being applied to the energy corporation?

3. There is no indication publicly of what the energy corporation will pay as part of ongoing operations expenditure or what share it will bear, if any, of phase-out or emergency response costs.

4. Will energy corp pay its portion of the provincial oil royalty on its assets? How will that be handled?

-srbp-

The value of an "equity" stake

In this Telegram story on White Rose royalty rates, Petro-Canada's Ron Brenneman notes that the Hebron partners would expect the province to pay full market value or a fair market price for any equity position in that project.

Ok.

Well, let's get it clear.

Equity is not about ownership as people like the Premier would like to have us believe.

Rather it is about operating an oil company or, as in the case of the Canada Hibernia Holding Company, reaping the benefits and sharing the costs of the oil companies. The Government of Canada picked up an 8.5% stake in Hibernia when Gulf Canada pulled out in 1992; if they hadn't done so, the project would have folded.

Danny Williams has only once ever put any figure on the "equity" stake he wants in Hebron. Net value to the provincial treasury?

$1.5 billion over the 20 year anticipated lifespan of the project.

That's right.

$75 million bucks a year.

To put that in perspective that's actually more than the provincial government has paid on the debt each of the past two years. Put every nickel of that equity profit into paying down debt - for example - and it would take us 171 years to pay off the $12 billion we owe.

Or put it this way: the Government of Newfoundland and Labrador takes in more from gambling each year than it would make on PetroNewf and that's by Danny William's own estimate. In 2007, the province will get $92 million from the lottery and that doesn't come with any of the environmental risk from operating an oil company.

By contrast, the province's generic oil royalty regime would drop upwards of $10 billion into the provincial treasury over the same 20 year lifespan. That would pretty much pay off the debt entirely in 20 years.

20 years versus 171 years.

$75 million versus $10,000 million.

That's the difference between "equity" and what you get from real ownership of the resource, a solid royalty regime and an actual development deal.

And you don't have to just accept those figures. Compare them to what the Government Canada gets through its equity stake in just one production license at Hibernia.

There are all sorts of wild claims out there by everyone from Sue to Danny - not as much of a gap as it might first appear, come to think of it - but the fact is that the feds have pocketed a total of $678 million in net profits since 1997, when oil started to flow.

Less than $70 million a year.

If you stretch that from 1992, it's actually about $45 million a year and that's an equity stake bigger than the one Danny talked about on Hebron.

Of course, it's all moot because the Hebron talks collapsed. The companies and the provincial government are exchanging information but there are no negotiations. There is no sign of when negotiations might start again, although, Premier Danny Williams has followed his usual negotiating tactic of establishing a unilateral and entirely artificial timeline, stating he would expect talks to begin in the fall.

But the "equity" stake, even if it is feasible, will not generate as much cash as many people seem to think.

-srbp-