An Unwavering Commitment to Inaction, Indecision, and Extra Pork #nlpoli

In 2010, the provincial government appointed Captain Mark Turner to look at the “province’s offshore oil spill prevention and response capabilities.”

He produced the 273 page report and the provincial government dutifully released it along with a lovely news release.

Then-natural resources minister Shawn Skinner committed that the provincial government  would “study the report, and consult with the responsible stakeholders to ensure all recommendations are considered.”

Noble gets deep water license in Gulf of Mexico

The United States Bureau of Ocean Energy Management Regulation and Enforcement has issued a license to Noble Energy to continue work on a well located 115 kilometres southeast of Venice, Louisiana, according to the Globe and Mail and other media outlets.

The company started drilling the exploratory well just before last year’s catastrophe.

The Wall Street Journal reports the well is in 6,500 feet of water.

There are six other permits for deep water drilling currently awaiting approval, according to the New York Times.

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Offshore regulator opens environmental assessment on Old Harry drilling proposal

Edited version of the Canada-Newfoundland and Labrador Offshore Board news release:

The public is invited to comment on the draft scoping document for the Environmental Assessment of an exploration well being proposed by Corridor Resources within Exploration License 1105 (the Old Harry Prospect) located in the Gulf of St. Lawrence, offshore Newfoundland and Labrador.

The proposed activity includes drilling one exploration well within EL 1105 using a mobile offshore drilling unit (MODU), that is,  semi-submersible drilling rig or drill ship, supply vessels, and offshore helicopters. Vertical seismic profiling (VSP) activities may also be conducted in conjunction with the drilling activities. Corridor Resources proposes to drill one exploration well between 2012 and 2014.

Before any petroleum-related activity can be undertaken in the Newfoundland and Labrador Offshore Area, a detailed and location-specific Environmental Assessment (EA) must be submitted to the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB). In addition, this project is subject to the federal environmental assessment process pursuant to the Canadian Environmental Assessment Act (CEA Act).

Pursuant to paragraph 18(3) of the CEA Act, the C-NLOPB as the responsible authority for the federal environmental assessment of the project is inviting the public to comment on the proposed draft scoping document prepared by the C-NLOPB.

Comments must be received by the C-NLOPB no later than Monday, March 28, 2011. Interested persons may submit their comments in the official language of their choice to information@cnlopb.nl.ca or to the following address:

Public Comments – Old Harry Project

Canada-Newfoundland and Labrador Offshore Petroleum Board

5^th Floor, TD Place

140 Water St., St. John’s, NL A1C 6H6

(709) 778-1400

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Offshore board releases complete #oilspill response plans

From the Canada-Newfoundland and Labrador Offshore Petroleum Board:

“The CNLOPB wishes to advise that Operator Oil Spill Response Plans will be available to the public upon request, and the plans will include oil spill trajectory model information and oil spill response management information that had previously been redacted.

Redaction of this information had been done based on advice given to staff, but the decision to release the information now is being made in the interest of the public’s right to know.

The CNLOPB committed to make Oil Spill Response Plans available to the pubic and to redact only the information that falls within a classification of being either personal, proprietary or security sensitive information.

Copies of the plans are available on request by e-mailing information@cnlopb.nl.ca”

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Hibernia Southern Extension MOU Assessment, Part I: Royalty - some potential added cash plus a cap

While Danny William’s radio tirade/meltdown is rapidly eclipsing his own good news announcement nationally, there is interest in assessing the details of the Hibernia South Extension memorandum of understanding based on the official news release and news reports on the day of the announcement.

Caveats

As with Hebron, the final agreement may yield some details which were not readily apparent when the MOU was announced.   As well, and as with Hebron, key portions of the deal are likely to be hidden from public view.   With that said, we still have enough information to make some observations about the proposed development deal.  In this first post, we will look at the royalty regime.

General

Overall, this agreement represents a transformation from Williams Mod 1 to Williams Mod 2 in the government’s approach to offshore oil development.

Williams Mod 1 (pre-2o06) was essentially a variation pre-1984 provincial government thinking and emphasised:

• increasing local benefits especially through forced development of refining and downstream production;
• some additional revenue from federal transfers, and
• an undefined “equity” interest which is essentially analogous to the old petroleum corporation.

Williams Mod 2 (post- 2006) places the greatest emphasis on additional government revenue through the most obvious source:  enhanced royalties. This is especially clear in the Simms encounter where the Premier states:

The reason we’re caught up in the oil, it’s not the oil, it’s the black gold that’s out there, it’s not the petroleum, it’s not the oil and gas, it’s the revenue that it brings to us, so that we can deal with problems in the fishery, so that we can take care of the Abitibi workers, so that we can build new hospitals and new long terms care facilities, so that we can build new schools, so that we can lead the country in poverty reduction, and it goes on and on and on. Surely you – presumably – run a municipality. You must know the importance of revenue, and where that revenue comes from – if it comes from business, whatever form of business it is, or if it comes from residential real estate, it goes into your coffers now so you can do all the wonderful things that need to be done. [Emphasis added]

Government-induced infrastructure has been effectively abandoned as evident in both Hebron and Hibernia South and the equity portion has also been capped artificially at 10%.  In Hibernia South, the second GBS or other production facility has been discarded for the most economical production method (slant drilling from the original GBS and tie-backs to the original GBS).

This effectively adopts the philosophy that guided resource development after 1985 and is best seen in the 1990 Hibernia agreement and in the subsequent developments at White Rose and Terra Nova.

As much as Danny Williams may like to complain about those who offer alternative views to his own, this basic approach has been noted before – including in this corner – as an alternative to Williams Mod 1. 

The easiest, most efficient means of enhancing government revenue is through adjustments to the royalty regime.   Revenue is needed to meet the demands for program spending and infrastructure development today. Regular readers of Bond Papers will recognise the refrain.

Hibernia Southern Extension Royalty Regime

The base for the three-part royalty is the existing Hibernia royalty regime as concluded in 1990 and modified in 2000. 

This sets the rate after simple payout (achieved a few months early) at 30% Tier 1 royalty with a further 12.5% Tier 2 royalty triggered by profitability.

This is the royalty rate – 42.5% -  that produces the bulk of the cash.

The royalty regime for the southern extension is cut into three parts.  There is no explanation as to why the rate is structured this way. The backgrounder provided with the news release does not explain the structure clearly.

Part I:    For the 50 million barrels or so that will be drilled directly from the Hibernia gravity base structure, there is the 42.5%  that already exists in the Hibernia royalty regime established in 1990 and modified in 2000.

There is no price trigger for this since the original royalty regime did not tie provincial government revenues to oil prices directly.

Part II:  For the portion of the project that is under the original production License 1001 (PL 1001), the basis is the original Hibernia royalty regime (maximum 42.5%, not tied to price).

In addition there is a further 7.5% royalty when prices for West Texas Intermediate (WTI) are above US$50.  Above WTI at US$70 there is an additional 5%. 

There is a cap on the royalty however: 

Should supplementary royalty payout be achieved under the terms of the original Hibernia contract be achieved, the top rate will be 50 per cent.

It would appear that once the project has triggered the Tier 1 and Tier 2 royalties (42.5%),  only an additional 7.5% is available beyond that irrespective of price. 

Part III:   There is a similar 50% cap in the new areas, i.e. the ones covered by PL 1005 and Exploration License 1093 (EL 1093).  The cap is achieved by reducing the incremental royalty tied to price (WTI at US$50) from 7.5% to 2.5%.

Observations

Overall, this represents a complex arrangement that modifies the existing royalty regime slightly. The complexity may be due in part to the highly diversified interests in the three licenses, especially EL1093.

In many pricing scenarios, then, the maximum available royalty from what is described here as Part II of the regime  would appear to be the same as under the existing Hibernia regime, i.e. 42.5%.

On the face of it, the Part II and Part III royalty structures offer an identical outcome.  Additional information would be needed to explain how the structure works and why it is in place.

The provincial government revenue figure offered in the announcement  - $10 billion – is apparently derived almost entirely by applying the existing Hibernia Royalty Regime to an environment in which oil prices are considerably above the average price that existing during the initial phase of the project.

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Money Update:  Premier Danny Williams told CBC’s David Cochrane today that the estimate of $10 billion of provincial revenue from Hibernia South is based on an estimated average oil price of $83 over the next decade.

There is something suspicious about the government calculation though since Williams claimed on Tuesday that five times as much oil left in Hibernia as in Hibernia South would net the province only slightly less cash than Hibernia proper even though both projects use essentially the same royalty regime:

We expect a further $13 billion from the remaining main field production and this extension adds an estimated $10 billion more in revenue for the province…

Lone 2007 offshore parcel awarded

The lone offshore parcel available in 2007 went to Corridor Resources, Inc, the Canada-Newfoundland and Labrador Offshore Petroleum Board announced today.

The Western Star incorrectly reported that the provincial government made the announcement. CNLOPB is a joint management board of the federal and provincial governments.

The C-NLOPB accepted a bid from Corridor Resources Inc. in the amount of $1,521,000 for the parcel which is composed of 51,780 ha. The Bid represents the expenditure which the bidder commits to make in exploring the parcel during the initial 5-year period of a 9-year term exploration licence.

The provincial government merely issued a news release stating that the land sale was a positive sign and attributing positive developments to the recently released energy plan.

Horse hockey. One solitary parcel is a sign of an offshore that is suffering a serious lack of interest from developers.

We'll need to see what happens in the next few years to determine if the energy plan has had a positive effect. The energy plan won't be complete and therefore won't have an impact until both the gas royalty regime and the oil royalty regime are finalized.

Update 05 Dec: The Star has corrected the reference in the current online version.

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Exxon confirms second Orphan Basin well

ExxonMobil confirmed Thursday that it will drill a second exploration well in the Orphan Basin offshore Newfoundland in 2008.

The well had been forecast but until Thursday, the oil giant had been reluctant to commit to drilling.

Its first well in the deep water area north of the Jeanne d'Arc Basin - site of current offshore production at Hibernia, White Rose and terra Nova - cost an estimated US$200 million.

The Orphan Basin is located approximately 390 kilometres northeast of St. John's. The area is estimated to hold as much as eight billion barrels of oil. Existing exploration parcels are both inside and outside Canada's 200 mile exclusive economic zone. Water depth ranges from 250 metres in the western portion to over 2500 metres in the centre. More detailed information on the area is contained in the environmental review conducted for the offshore regulatory board in 2003.

Also on Thursday, ExxonMobil reported third quarter profits were down 10% form the same period in 2006.

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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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India looks to attract "Big Oil"

While some parts of the world are making it harder for oil companies to explore and develop, India is changing its regulatory policy to attract Big Oil and its capital for investment.

"An open acreage policy will be much more attractive to us as we can choose the time of entering India’s exploration sector, and also choose the blocks we want to explore," a senior Shell official said.

Shell, like British Petroleum, Chevron, Exxon, Petrobras and Total, did not bid for exploration blocks in earlier NELP rounds.

The timing, to offer the auction of exploration blocks in India in June or July, does not suit most oil companies as they have already put in their capital expenditure on exploration into other areas across the world, the Shell official said.

"By July, we have already put in our annual planned expenditure for exploration in projects. That is one of the reasons why we are not able to bid in the auction in India," said an official of British Gas, which won one exploration block in NELP VI, in partnership with ONGC.

Government officials say the launch of the OALP is slated to take place soon. "We are working towards offering the open acreage policy together with NELP VII. However, that would involve lot of work as data for areas across the country have to be collected," an official at the Directorate General of Hydrocarbons said.

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FP backgrounder on the local oil and gas industry

From the Financial Post's Claudia Cattaneo, a feature piece on the local oil and gas industry over a year after the Hebron failure.

Your humble e-scribbler is quoted in the piece.

Even as people leave the province in large numbers to make a living they can't find locally, they support his bashing of outside interests, whether its big oil companies or the federal government, because he stands up for Newfoundland. They buy into Mr. Williams' claim that the government negotiated a bad deal on Hibernia and now must ensure the government takes a fair cut from future projects.

Mr. Gibbons, who signed the Hibernia deal nearly 17 years ago in an environment of low oil prices and greater risk, said it was a huge leap for the province.

"It's the deal that gave us the industry that we have today," he said.

After a decade with Jacques Whitford, Mr. Gibbons retired yesterday, but his interest in a thriving offshore hasn't diminished.

"Please, get at the table and negotiate, and let's get on with the next projects," he pleaded.

"We are going to lose the skilled people that are required even for the construction part. Today, they are flying to Alberta and flying back home. But in five years' time, they may move the spouse and the kids will do their education there. Then they might never come back."

As an interesting addition to that comment, check out Greg Locke's most recent blog entry. Locke is a professional photographer and journalist - as well as an avowed Newfoundland nationalist - who recently left the province to take up a management job with a string of Alberta weeklies.

His reports from Alberta on the real attitudes of ex-pats living there may give a clue to why people like Gibbons are so concerned:

Of my conversations so far with the Newfoundlanders, I'm hearing the "politically correct" phrases about returning to but it's not said with much enthusiasm. No mourning or homesickness to be heard. It's lacking that convincing little flutter in the voice. Indeed, those who have a decent paying job here are looking pretty happy. The flags may be flying proud but they are not ready to sacrifice their livelihoods or future to return to Newfoundland .

Locke's also got some observations on the Alberta government's royalty regime and its tax policy for those in this province who harbour more than a few delusions about how this province supposedly has signed bad oil development deals in the past or how this province is treated unfairly compared to Alberta.

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Telling fantasy from reality in the offshore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That is until positions or players change.

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Chavez seizes last private oil fields

Shortly after midnight Monday/Tuesday, Venezuelan soldiers moved in and state oil company workers in hard hats raised the Venezuelan flag over four oil fields in the Orinoco Basin.

In Orinoco, Chavez says the state will take a minimum 60 percent stake in the operations, but he is urging the foreign companies to stay and help develop the fields. They have until June 26 to negotiate the terms, including compensation and reduced stakes.

The companies appear to be taking a tough stand, demanding conditions - and presumably compensation - to convince them that Venezuela will be a good place to do business.

In a related development, Venezuela will be leaving the International Monetary Fund and the World Bank as part of Chavez's efforts to move the country away from capitalism. Chavez is also nationaliizing electricity production in the country and has threatened to seize private hispotals if health care costs continue to rise.

There are some limmits to Chavez's nationalisation. The state-owned oil company reportedly needs the continued involvement of private multi-natyions such as Chevron and ExxonMobil since the company lacks the expertise to fully exploit Venezuela's oil fields.

Mercopress, an independent news agency in Latin America, describes Tuesday's developments this way:

But in spite of the bombast, this “nationalisation” is in fact the start of a renegotiation of contractual terms that will more than likely leave PdVSA with a majority stake.

The international oil companies – ConocoPhillips, ExxonMobil, Chevron, Total, BP and Statoil – are being faced with several key issues: whether they will retain a sufficient stake to make staying worthwhile; how they are to be compensated for their reduced share; and whether they have a hope of exploiting reserves technically owned by Venezuela.

The market value of the companies’ assets in the Orinoco Belt is about $15bn (€11bn, £7.5bn) meaning $4bn-$5bn is at stake, although analysts say compensation is likely to be less given Venezuela’s threat to pay only book value.

Americans open new offshore leases

The United States interior department announced today it had open lease sales on 48 million acres of offshore land in the Gulf of Mexico, offshore Alaska and the central Atlantic continental shelf off Virginia.

Interior secretary Dirk Kempthorne said the 21 parcels could yield as much as 10 billion barrels of oil and 45 trillion cubic feet of natural gas.

The total estimated potential oil reserves offshore Newfoundland and Labrador is 10 billion barrels.

The official news release described the five year outer continental shelf exploration program as follows:

There is no leasing proposed within 125 miles of the Florida coast or east of the military mission line in the Eastern Gulf. The program includes a Central Gulf sale in 2007 that involves a portion of the Sale 181 area and, as mandated by the Gulf of Mexico Energy Security Act of 2006, one lease sale in the Eastern Gulf in 2008.

The Act, signed by President George W. Bush on December 20, 2006, requires oil and gas leasing in a portion of the area known as the “Sale 181 Area,” consisting of 2,574,823 million acres, of which 2,028,730 is in the Central Gulf and about 546,093 acres is in the Eastern Gulf of Mexico Planning Area. The proposed sale area “181 South” consists of 5,762,620 acres. The total of new areas in the Gulf offered under the proposed program is 8,337,443 acres.

The leasing program schedules eight sales in Alaska: two in the Beaufort Sea; three in the Chukchi Sea; up to two in Cook Inlet; and one in the North Aleutian Basin – in an area of about 5.6 million acres that was previously offered during Lease Sale 92 in 1985. There are currently no existing leases in the North Aleutian Basin. These areas would be subject to environmental reviews, including public comment, and extensive consultation with state and local governments and tribal organizations before any lease sale proceeds.

The release included a backgrounder and fact sheet.

While some of the areas included in the interior department program would be new to exploration, the Gulf of Mexico lands are adjacent to a well-established oil and gas producing region with considerable infrastructure. As well, the Gulf Of Mexico is close to some of the largest refineries in the United States.

All of this increases competition for exploration attention in comparison to the Newfoundland and Labrador offshore. The local offshore holds and estimated 0.4% of the world's estimated oil and gas reserves.

An analysis of global trends in exploration were linked in this post on Australian energy development. The new head of Chevron discusses his company's global plans in the story and the podcast linked from this post.

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Raude heads south

Having finished at Great Barrisway F-66 in the Orphan basin, the drill rig Eirik Raude is off to the Gulf of Mexico to complete a drilling program there on behalf of ExxonMobil.

Before leaving Newfoundland waters, the rig will stop at Marystown where it will undergo inspections and recertification, a process required for drill rigs every five years.

The Eirik Raude is likely to return to the Orphan Basin in 2008 or 2009 to continue exploration. The Great Barrisway hole was drilled in 2,350 metres of water, deeper than any other well drilled so far offshore Newfoundland and Labrador.

Initial estimates were that the exploration well would cost $140 million based on an estimated four months drilling. As completed, the well took seven months.

On top of the harsh ocean environment offshore Newfoundland, the water depth in the Orphan Basin calls for cutting edge technology. Pressures at the depths involved can be as much as 200 times the atmospheric pressure at the ocean surface.

Great Barrisway F-66's water depth rivals those in the Gulf of Mexico. Chevron's Jack 2 field in the Gulf of Mexico was discovered at a water depth of 2100 metres and 6100 metres below the sea floor.

But drilling to such depths provides many daunting engineering challenges.

Such equipment, for example, must be built to handle tremendous weight.

"The way the drilling process works is that you put sections of pipe together one at a time as you run [the pipe] through the water and down into the earth," Hadden said. [Steve Hadden, senior vice president of exploration and production at Devon Energy in Oklahoma City, quoted in the National Geographic story linked above.]

"You keep adding to the drill string until you reach the total depth of the well. So [in this case] you've got a 30,000-foot-long [9,144-meter-long] string of pipe hanging off a floating rig," he added.

"You can imagine the weight requirements, and you have to have the ability to lift it to the surface to change the drill bit."

Twenty thousand feet (6,096 meters) of the large diameter pipe that encases the drill hole tops the scales at over a million pounds (453,000 kilograms).

The enormous pressures found in deep wells are another major hazard.

Too much pressure can make it difficult to control the drill bit. Or the pressure could collapse the hole altogether.

Drillers must therefore use seismic readings while drilling to predict how high pressures will be at future depths in order to keep the hole viable.

Danny and John get along well

From the Tuesday National Post, this article on the strong, positive relationship between Premier Danny Williams and Husky Energy's John Lau.

At Husky's annual meeting last week, for example, the Hong Kong-born accountant gushed that the premier has been "very helpful" to Husky and that his company, in return, is eager to "work with the government and share the upside."

The relationship between the Premier and the oil man stands out in light of other stories that there is tension between the Premier and the industry.

When asked about the secret of his relationship with Mr. Williams, Mr. Lau said Husky and the province are so transparent with each other it's resulted in a level of trust that is unusual "between a corporation and the government."

"We understand what the government wants, and the government understands what we want. We have no hidden agenda," Mr. Lau said, giving credit to his team in the province, led by East Coast vice-president Ruud Zoon.

Husky would not be averse to having the government as an equity partner as long as it doesn't affect its bottom line, Mr. Lau added.

The real clue to what makes this relationship work actually comes later in the piece. it has to do with the individual styles of the two men.

Some argue it's also a matter of style. Despite their vastly different backgrounds, the two leaders have kindred spirits: both see themselves as outsiders who don't get enough recognition, are highly successful, built organizations in their own image, are hands-own and hard to work for.

Fundamentally, though, Husky Energy is following a pretty standard approach to any relationship: the company is trying to find common ground, bearing in mind that whatever it might consider, including an equity position for the province, is governed by the corporate bottom line.

There are strong signals that Danny Williams is looking to change the perception of his policies if not the substance of the way he approaches relationships. In the confrontation with the federal government over Equalization, Williams has repeatedly stated he is not seeking confrontation for the sake of having a racket. He said much the same thing over the weekend following a meeting with federal Liberal leader Stephane Dion.

Ultimately, that's both factually accurate - he isn't really fighting for the sake of fighting - and a sign that Williams understands what is needed to foster mutually beneficial relationships. As Michael Harris said of Brian Peckford a quarter century ago, "dogma is no substitute for dialogue, and compromise no synonym for weakness."

The politics of outrage runs aground

From today's Globe?

Nope.

Try February 23, 1983.

Following is a Michael Harris piece that originally appeared in the Globe and Mail in the aftermath of the first court case on offshore ownership (the one the nationalists like to forget).

The odd thing is that it doesn't take much adjustment to have this story apply equally well today. A feisty Premier, given to fighting anyone, anywhere, anytime in the best interests of Newfoundland and Labrador, and yet finding himself coming up short.

So to speak.

So for your reading enjoyment is this blast from the past, titled in the original as this post. Don't be confused by some of the references, by the way. Almost a quarter of a century ago, Jim Hodder was a Liberal member of the legislature. Hodder crossed the floor not long after this article appeared. He's like Tom Rideout, at least in that respect.

Leo Barry went on to lead the Liberal Party and was later appointed a justice of the Supreme Court. Brian Peckford is in British Columbia advising people out there about starting an oil and gas industry.

______________________________

"One cannot reasonably demand that discussions take place on the basis that it would constitute only additional obligations for one party and only benefits for the other."

- Rene Levesque to Brian Peckford on the
Upper Churchill Power question,
April 29, 1980.

There is a caveat to Rene Levesque's otherwise self-evident assessment of what constitutes meaningful negotiations - it is not applicable when dealing with Newfoundland.

For three years now, Premier Brian Peckford has practiced the politics of outrage on a range of arguably outrageous disputes in which Newfoundland has become embroiled.

In the two most celebrated quarrels - with Quebec over Labrador hydro-power and Ottawa over offshore resources - his strategy has been identical. Mr. Peckford has developed a quasi-moral position and then gone on to defend it with messianic zeal. ''Pre-conditions'' has become the buzz word when negotiating with Newfoundland. And if the notion of preconditions precluded meaningful negotiations, that was a problem for the other guy. Newfoundland would soldier on and eventually triumph because Newfoundland was in the right.

As political strategy, the approach has been a howling success - so far. Newfoundlanders unabashedly admire their battling Premier. So much so that the opposition Liberals were almost wiped out in last year's emotional provincial election. Securely wrapped in the provincial flag, Mr. Peckford rules his caucus with an iron hand and the House of Assembly with an iron tongue, much as Joey Smallwood did in his political prime.

But as a means of realizing Mr. Peckford's stated public policy goals, the feisty, inflexible approach has been an abject failure. The Upper Churchill Power Contract remains in full, ruinous force, depriving Newfoundland of $750-million a year to which the province feels entitled. And the vast oil resources off the province's southeast coast remain undeveloped.

Worse, politics as the art of being right has shifted both disputes to a forum where politicians are powerless to influence the outcome - the courts.

The stark reality of what that can mean was demonstrated last week when the Newfoundland Court of Appeal ruled that Ottawa owns resources on the continental shelf off Newfoundland. In a single stroke, the Newfoundland Petroleum Directorate became a legal fiction, the province's oil and gas regulations lost their force, and Mr. Peckford's bargaining position with Ottawa suffered a devastating blow. Ironically, Mr. Peckford must now appeal for his justice to the very court he has consistently described as the tribunal of central Canadians, the Supreme Court of Canada.

Predictably, the political opposition has argued that such epic blundering with the province's long-term future requires the supreme penalty - in the wake of last week's decision, Liberal MHA James Hodder has demanded Mr. Peckford's resignation. But the reaction of fellow Tories, particularly Newfoundland's former energy minister Leo Barry, is of far greater significance.

Mr. Barry has become the first Conservative to publicly criticize Brian Peckford since he became Premier in 1979. Two years ago, the Yale-trained lawyer and author of Newfoundland's oil and gas regulations resigned from the Peckford Cabinet over differences with the Premier on how offshore negotiations with Ottawa should be conducted. Now Mr. Barry is pointing out, ever so delicately, that the ownership question should never have been referred to the Newfoundland court in the first place and that the Newfoundland Government acted ''precipitously'' in so doing.

What makes Mr. Barry's comments all the more significant is the fact that he espouses the same goals as the Premier. Like Mr. Peckford, he too believes Newfoundland is entitled to ownership of offshore resources. But unlike the Premier, his formula for achieving ownership hinged on keeping negotiations with the federal side going and, if a deal couldn't be struck, waiting for a change of governments in Ottawa.

His reasoning was simple. Having already offered Newfoundland 100 per cent ownership of offshore resources in 1980, a Conservative government in Ottawa would have a hard time reneging on that offer if returned to power at some time in the future.

Against the backdrop of his defeat in the Newfoundland courts, and criticism from an prestigious member of his own caucus, Brian Peckford continues to talk tough. But his words are less important now than what happens in the Supreme Court of Canada in the coming weeks.

If the high court upholds the position taken by the provincial Supreme Court, as many legal observers believe it will, the Rowdyman of Newfoundland public life will have learned a harsh political lesson: dogma is no substitute for dialogue, and compromise no synonym for weakness.