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.

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.

Muskrat Falls costs jump by $1.0 billion #nlpoli

Cost estimates for the Muskrat Falls project have apparently jumped by 16% -  $1.0 billion  - in the past year.  That’s based on information released by the provincial government on Tuesday and the details of the federal loan guarantee.

The new price appears to be $7.2 billion.  The Decision Gate 3 estimate, released in October 2012, was $6.2 billion for the Muskrat Falls dam, a tie to Churchill Falls, and the line to Soldier’s Pond on the island of Newfoundland.

The new cost is 44% more than the $5.0 billion cost estimate for the dam and island link components of the project when it was approved in late 2010. 

The cost of not doing the math #nlpoli

Natural resources minister Jerome Kennedy admitted over the weekend that he had not done the calculation to figure out if the equity stake in Hebron was worth the cost compared to just a change in the royalty regime.

CBC’s David Cochrane put the question to Kennedy after seven minutes or so of Kennedy’s recitation of talking point after talking point about the Hebron project and the impact of the massive increase  in costs.  In response to Cochrane’s relentless, detailed questioning, Kennedy tried every folksy analogy in his arsenal of banalities.  He talked about putting away money for your children’s education.  He tried the bland admonishment that the government would look after the future, not just do what was immediately popular. 

Kennedy even tried to suggest questions about public finance  - and the impact of spending billions on resource projects – should go to Tom Marshall.  Since the provincial government struck a deal with the Hebron partners in 2007, the estimated cost of the project has tripled.  Cochrane noted the cash commitments.

And finally with his acknowledgement he hadn’t done the math himself, Kennedy blinked on a basic element of the provincial government’s strategic plan.

Hebron: Did Williams kill the $10 billion fatted calf with last minute gamble?

Some additional information on the failed Hebron deal came to light on Tuesday in the House of Assembly.

The Hebron project was a $5.0 billion construction megaproject that would have delivered an estimated $10 billion dollars in royalties to the provincial government over the life of oil production.

Following are Premier Danny Williams' remarks with notes and comments after each. The posting runs more or less sequentially as Williams responds to questions from Opposition House Leader Kelvin Parsons.

If you want the truly surprising information, skip to the section marked "*".

1. On the equity position:

"...A critical milestone for them on equity was 5 per cent. Five percent and above jeopardized the joint venture agreement. There was extra voting rights. There were other rights and privileges that were above 5 per cent. Our preference would have been to obtain, at least, 8.5 per cent. That was our original goal because that is a benchmark which has been set by the federal government in the Hibernia project and that was a number that we were trying to achieve. However, in order to try and reach an agreement with these companies, we moved to the 4.9 per cent position because that was a position that they felt was acceptable to all the partners...."

Comment: This is interesting because for the first time the premier has indicated both the preferred size of the equity position (8.5%) and the subsequent position he contends was agreed to by all parties (5%).

Most interesting is the revelation that the province proposed a 4.9% since this level precluded the province from holding voting rights that would affect the original joint operating agreement.

This acknowledges two things. First, the province would not have held a full equity position in the project, thereby begging the question of what exactly the Premier was seeking so stridently and why.

Second, since the equity position was placed below 5% in order to avoid affecting the joint operating agreement the Premier implicitly confirmed the partners contention that equity was a new condition placed on the Hebron project by the province after April 2005.

2. The cause of the collapse:

"...we basically had a tentative agreement on equity and on super royalty on Thursday evening. The matter on which it broke down, which I explained yesterday to the House, was they reverted to the January 26 position, which is investment tax credits which were in the range of $400 million to $500 million, which was something that we had virtually assumed was off the table and was gone. They then reverted to a position of two months ago, which was absolutely unacceptable to the Province."

Comment: It is interesting that the Premier chose the words "we had virtually assumed" when discussing the issue of the investment tax credit and the sales tax credit on fuel purchases related to the development. Ordinarily, the parties to a negotiation would exchange plain language statements of what had been agreed to. Such an exchange would be particularly important if, as the premier contends, there was an agreement on Thursday evening. This approach is intended to avoid the very circumstance - potentially a misunderstanding - which seems to have occurred.

Apparently in this case a detail significant enough to cause the deal to fall apart was "virtually assumed" to have been eliminated. When one assumes one makes an ass...

The overall approach here may be similar to the slipshod way the province handled discussions with Ottawa in 2004. The federal and provincial governments did not begin negotiations (exchange proposals and position statements) until October. Detailed talks took place throughout November and into December, with Williams making a dramatic pre-Christmas explosion not unlike his media scrum on Monday.

This comment by the Premier begs one of the major questions surrounding the Monday disaster: how could $500 million scuttle a deal that would deliver to the provincial government royalties equal to or greater than the total provincial debt ($10 billion)?

* Alternate explanation: The Premier killed the deal by adding equity and insisting on it.

Later in Question Period, the Premier described the collapse this way:

Then when they send a memorandum into us, the memorandum gets cute and basically comes back and says: Oh, yes, but we want all the terms that are in the January 26 agreement, with the exception of these two. So, we basically said that is not on. Because what would have happened then, that would have clawed back everything that we gained. We would have ended up with an agreement that was basically less than generic, which is exactly what your government was prepared to accept some two years ago.

Comment: In this section the Premier refers to a January 26 agreement. Williams is normally careful in the words he uses. To refer to January 26 as an agreement may be taken as deliberate or at least a reversion to terms he has used in private.

Note that the Premier had previously referred to January 26 as being merely a position taken by the Hebron partners. (See Point 1 above)

Also, the Premier refers to the companies as having brought back the January 26 agreement less two clauses. The Premier's contention up until this point has been that it was the addition of two clauses to the late March agreement that caused the collapse.

This is significant since the Premier's new version suggests a foul-up on the part of the provincial negotiators ("we had virtually assumed") with the magnitude of the error only becoming apparent once a final summary was exchanged.

These comments by the Premier also reinforce the contention that equity was a last-minute addition to the agreement. Note that Williams did not publicly make equity a condition of a deal until after 26 January. Check that in a previous Bond Papers posting, "Hebron, the premier and getting a deal".¹

Ultimately, though, this particular description of the collapse raises significant doubts about the Premier's account of events. On a deal with provincial revenues on the order of $10 billion with hundreds of millions of dollars of added benefits for the private sector in the province, it is curious that the addition of $500 million in short-term tax concessions would completely negate every other gain the Premier had supposedly made.

If the Premier had negotiated such a remarkable agreement, then by his own account, $500 million would turn this deal into one that involved the province getting less revenue than provided in the generic royalty regime.

On the face of it, this seems preposterous.

These comments make more sense if we interpret these remarks to mean that after a period of discussion with the Premier on so-called super royalties and something being called an equity position, the companies rejected the Premier's efforts to change the January 26 agreement.

Instead, their final position was to insist on the January 26 agreement already reached, including tax concessions but "without these two elements", that is super royalties and equity of any size.

The reference to "clawed back everything gained" would refer to the loss of equity and super royalties which, in fact might not have been gained at all.

This is consistent as well with a comment in a presentation made by Chevron's Mark Macleod in February 2006. One of Macleod's bullet points in a slide show on Hebron indicated that the companies were "re-evaluating potential for development". The language is telling. The project is not being evaluated. There are no discussions to finalize an agreement. In February 2006, the Hebron partners are evaluating the project once again for development.

The only comments the Premier would need to clarify is on the January 26 agreement producing royalties of less total quantum than the generic regime.

3. The cost of buying out ExxonMobil's 38% interest in Hebron

"...Having said that, with regard to the price that the government is prepared to pay for Exxon Mobil'’s interest, we are dealing in hundreds of millions of dollars here. I am not prepared to announce to Exxon Mobil today what we are prepared to pay them...."

One would expect that the price for the major shareholding in a project like Hebron would comprise costs incurred to date, possibly a portion of the $5.0 billion construction costs and almost certainly compensation for future earnings on revenues from oil sales.

To give some sense of what gross revenues would be on Hebron, the current value of Hebron oil, based on US$50 per barrel oil would be $35 billion. Even using a discounted price heavy oil running US$15 lower than that, the field is worth $24.5 billion. It is difficult to imagine ExxonMobil selling its interest for the hundreds of millions the Premier claims it would cost.

-----------------------------
¹ During the offshore revenue talks in 2004, the premier consistently shifted his public position once agreement had been reached on certain points. It was not until Ottawa stood firm in October 2004 that Williams came to the table and negotiated a final deal. Several posts on this can be found here.

It is not unusual, for example, for the Premier to claim that an agreement existed when no negotiations had taken place, that there was an agreement when evidently there was not one, or that, as in this case, the other party was being perfidious. careful examination usually reveals something closer to the truth than the Premier's often contradictory statements.

Great Gambols with Public Money: Muskrat Falls version #nlpoli #cdnpoli

While she is telling others to stand by for tough budgets and tight times, Premier Kathy Dunderdale is planning to spend more than $3.0 billion in accumulated oil surpluses to build the Muskrat Falls dam.

Now that is no surprise to SRBP readers nor is it a surprise to people who’ve been paying attention to information disclosed as part of the public utilities board hearings into the project.

Nalcor boss Ed Martin confirmed it on Tuesday in a call to Randy Simms on VOCM’s Open Line.  Here’s the relevant bit of the Simms and Martin exchange:

Randy Simms:  Government of Newfoundland?

Ed Martin:  And the Government of Newfoundland will also be putting some equity in as well. They’ll transfer cash to us to put in as equity.

Simms didn’t ask how much, but the amount is right there in Nalcor’s answer to a question from the PUB.  CA/KPR-NALCOR- 20 includes a table that lays out the “Stakeholder Equity”. The only Nalcor stakeholder is the provincial government.

Note that it shows financing for the generating facility is 100% equity.  The amounts shown in the column “Plus Equity Contributions” adds up to $2.853 billion. That’s the cash transfers Martin was talking about.

On the other side, the ledger shows another $460 million in equity – cash, that is – and that represents 25% of the cost of the transmission line.

What’s most interesting is that Martin didn’t discuss 100% equity with Simms, even though the Nalcor submissions to the PUB discuss it repeatedly. Martin said:

The 60 / 40 is generally what it is going to be. That may end up being 57 /43 or whatever. But it will be around that.

60% debt.

40% cash, that is equity.

Still, it would likely be safe to start from the premise that Nalcor’s calculations and the provincial cabinet’s endorsement of this project is based on having very little public debt, except on the transmission lines.  That’s a pretty wild assumption, of course, given the provincial government’s miserable experience with delivering capital works projects on time and close to budget. 

Still, if they think they can do it, Nalcor and the provincial government might be tempted to believe they can get the whole thing for cash on hand with only a few hundred million in borrowing.  As Martin noted, Nalcor will use other revenue of its own – like from the equity stakes – to add more cash to the pile if need be.

That would also explain how they think they can keep electricity rates low.  Without much of a debt load to repay, they can just cream of any profits. If things are worse than expected, the provincial government just won’t make any money back on the project at all.  They’ll tell the punters that their great dividend from oil and gas is discount electricity.

You can see that kind of thing in Ed Martin’s closing remarks:

But any cash that goes into this project, any returns that come from it, are staying in the province and results in 100% ownership of an asset for the people of Newfoundland and Labrador, essentially forever.

Sounds wonderful.

Sounds marvellous.

Sounds fantastic until you realise that  Martin knows that this project won’t sell electricity anywhere but inside the province. 

That means that the people of Newfoundland and Labrador will pay for the Muskrat Falls project up front with their billions in cash from oil.

Then they will pay for all the electricity that comes from it, including the stuff shunted off to Nova Scotia for free.

In effect, the people of Newfoundland and Labrador will be paying themselves back for the money they borrowed from themselves in the first place.

In order to make that work and to keep the electricity prices at a rate people wouldn’t scream about, the provincial government and Nalcor plan to let the people of the province pay themselves back over the course of a half century.

Now you can understand that all this makes a bitter lie of the claim by project proponents that this project will have a revenue stream and pay for itself.  The only “revenue” is what the ratepayers will pay annually for their electricity.  As SRBP noted before, people will be forced to pay for the costs annually plus a profit because that’s the way the public utilities board sets electricity rates.

Don’t miss the point though - Muskrat Falls is not a revenue stream:  it is a tax on the people who own the resource in the first place.

One can scarcely imagine or a more cynical political gambol with public money.

- srbp -

.

Just do the math: Wiseman confirms Muskrat Falls cost at $7.3 billion #nlpoli

Twitter sometimes produces some gems.

Like on Tuesday when Tom Baird,  a mathematics professor at Memorial pointed out that the province’s finance minister had a wee bit of a problem with basic math.

“Just do the math,”  Ross Wiseman told Liberal leader Dwight Ball during Question Period on Monday.  “ Based on the current projected cost of that project of $6.9 billion, our investment over time, over the life of that project, the construction of that project, will be about $2.3 billion…”.   And that $2.3 billion, according to Wiseman was the 25% investment the provincial government had always said it would put into the Muskrat Falls project.

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-

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-

Hebron equity and a possible conflict of interest

Premier Danny Williams provided more information in the House of Assembly on Wednesday about negotiations between the Government of Newfoundland and Labrador and the companies that proposed development of the Hebron-Ben nevis field offshore Newfoundland.

Following are extracts from the Premier's comments, followed by commentary.

1. On the equity position:

The reason we went from 8.5 per cent to below 5 per cent was because 5 per cent was a critical turning point in the joint venture agreement. The partners could not unanimously deliver more than 5 per cent to the Province of Newfoundland. Under that circumstance, there would be absolutely no agreement whatsoever. Four point nine percent is critical because when you get to 5 per cent there is an absolute veto right on all decisions.

This Province, in order to achieve 4.9 per cent, which could probably give us $1.5 billion additional return over time, was prepared to concede a veto right. We are not interested in a veto right on the project. That is the reason.

Comment: Two new significant pieces of information here.

First, we learn for the first time that an equity position above 5% would have given the provincial government a veto over management decisions. From other public comments by the Premier and others it appears that the companies either could not would not alter the joint operating agreement, hence the government's decision to accept a piece of the operation beyond royalties and other revenues at 4.9%.

The Premier's remark at the end that the province didn't want a veto is moot since the province could never have obtained one under the circumstances without likely forcing a complete renegotiation of the joint operating agreement signed in April 2005 among the corporate partners.

Second, we learn for the first time that the equity position was estimated to yield $1.5 billion in revenue that was over and above the $8 to $10 billion going to the province in royalties.

2. A. Was there a January 26 agreement or a position taken by the corporate proponents?

It was a January 26 position. That is exactly what it was. It was a position that had been negotiated down from their position over the course of two months. That is what was done between Mr. Martin and Mr. Bates, with intervention by us at certain points in time. What they did on last Thursday night, when we finally got down to the two final issues - which was equity and super royalty. When we had agreement on those issues, they reverted to the January 26 position, which included investment tax credits, which would have cost the Province about a half billion dollars. So, you had four companies that, collectively in revenues last year, made $590 billion and were looking for our Province to give them another half billion dollars. That simply was not on.

Comment: There are two new pieces of information here as well.

A. Recall that yesterday the Premier referred at one point to a January 26 agreement. The Premier categorically states today that in fact there was no January 26 agreement. He notes that there were negotiations which latterly dealt with the equity position and so-called super-royalties.

On Tuesday, the Premier said, describing the companies position: "Oh, yes, but we want all the terms that are in the January 26 agreement, with the exception of these two." Even if we grant that there was no formal agreement on January 26, it appears likely that ultimately the companies did not accept the provincial government's position on equity and super-royalties.

The Premier has said there was an agreement on equity and super-royalties; evidently there wasn't, otherwise the companies would not have reverted to their position on January 26 less two items, namely equity and super-royalties.

Part of the difficulty in assessing the Premier's comments may come from the different definitions he seems to apply to agreement depending on when he refers to his position and when he refers to the position taken by the companies. The negotiations do not seem to have followed a pattern in which items were settled and formally noted as settled. Thus, the parties - particularly the provincial team - could make a fundamental error in believing that some issues were settled when in fact they had not been.

When the Premier states there was an agreement up to this past weekend and that January 26 was a position, he is stating his interpretation of events. The companies may well have felt that from their standpoint, the January 26 position represented the basis for agreement given discussions up to that point.

We do not know when the Premier formally presented the demand for an equity position, however it appears likely that negotiations did not begin on this point until after January 26. Note that the premier did not publicly indicate that equity was a condition of an agreement until after January 26. Note as well that the Premier indicates the January 26 "position" was the result of two months of negotiations from a previous position put forward, presumably by the companies. One can easily see how such a process could lead to this document - if it is a document - being called an agreement, especially if the provincial team did not reject it formally or proceed to amend any of the contents.

By the same measure, the companies could conduct discussions in good faith, as it appears both parties did, have some legitimate misunderstandings and see the whole deal collapse at the last minute to everyone's evident consternation.

B. Was there an inherent conflict of interest in the provincial negotiating position?

The Premier refers to negotiations conducted by two representatives, namely Mr. Martin on behalf of the provincial government and Mr. Bates on behalf of the Hebron consortium.

Mr. Martin is Ed Martin, a former oil industry executive and currently chief executive officer of Newfoundland and Labrador Hydro.

These negotiations had two elements: one focused on the demand for an equity or partial ownership position in the operating consortium. The second was on royalties and other revenues to be paid to the province as economic rent for oil production as well as local industrial benefits as defined in the Atlantic Accord (1985).

To date, the Premier has not indicated how the shares in the operating company would have been managed. They could be held by an corporation like the Canada Hibernia Holding Corporation which reports to the federal energy minister. His officials would represent the federal government in making any decisions related to the federal government's shares in Hibernia, for example.

More likely, the shares would have been held by Newfoundland and Labrador Hydro as the province's new energy corporation or in a holding company managed by the revamped Hydro corporation. This would be consistent with the Premier's comment to the National Post:

With Newfoundland's business community anxiously holding out hope that negotiations will be revived on the Hebron Ben Nevis offshore oil project, Premier Danny Williams yesterday made it clear he is prepared to make the province a full-fledged partner in the multi-billion-dollar venture.

"We are prepared to have a full stake and, if necessary, at some point we will get involved in frontier exploration, whatever the opportunities are," Mr. Williams said in an interview.

Mr. Williams said his government is prepared to participate in all aspects of developing his province's offshore oil and gas resources through the provincial hydro corporation. He said he would like to model Newfoundland and Labrador Hydro after Quebec Hydro and Norsk Hydro, Norway's state-controlled energy company. [Emphasis added]

There is the strong possibility that by combining these two very different sets of negotiations in one that the province placed itself in a position whereby acquisition of shares in the operating venture could be inappropriately related to the province's royalties and other similar revenues. This would be similar to the Hibernia negotiations in which the province essentially traded off the gravity-based structure costs against future royalties.

Such a situation is implied in the Premier's comments on Tuesday that suggest the request for $500 million in tax concessions reduced the overall benefit of the equity position, even though the two issues should actually be considered separately. The equity stake had an intrinsic public policy value separate from the other "provincial benefits". As such the cost of the tax concessions ought to have been weighed against the $10 billion in royalties, not the $1.5 billion returned by the shares, or any combination of the two.

Of greater concern, though is the potential that in the second share management scenario, Mr. Martin was effectively placed in a conflict of interest during the negotiations themselves. Had the negotiations been successful in the second share management scenario, Mr. Martin would have been, for all intents and purposes, a co-owner of the Hebron development. As such, he would have naturally been concerned to lower the start-up costs of the project in an effort to maximize corporate profits. These profits would then be turned to whatever purpose the Crown-owned agency determined, including development of the Lower Churchill.

There is no question that in a typical situation, Mr. Martin as an operator, would naturally look positively on a request to lower start-up costs such as requesting forgiveness of certain taxes or the seeking of certain tax credits. No matter what a company's overall financial position, a project such as Hebron would be expected to operate as efficiently as possible, with the lowest costs and hence the maximum profits.

At the same time, though, Mr. Martin was operating as the province's chief negotiator on behalf of the public treasury. In a manner of speaking he was functioning as the tax collector. As such he would seek to maximize the revenue flowing to the public treasury; naturally this is separate from the Hydro corporate treasury. Thus, his negotiating brief ought to have given him clear direction to minimize concessions, except in so far as those concessions would bring a greater return in such things as local jobs. His public treasury role ought to have carried with it considerations separate from those of his brief as a co-owner of the development along with the major oil companies.

Under the second share management scenario, Mr. Martin appears to have been in a conflict of interest. He was on the one hand seeking to maximize the treasury returns while at the same time negotiating his way onto the Hebron management team, with its obvious concern to lower costs and maximize profits.

It is irrelevant that Mr. Martin would have been placed in this position by the provincial government itself. The provincial government appears to have been trying to achieve two separate public policy goals in the same set of negotiations. This may have contributed to the collapse of the negotiations.

Government Abandons Energy Plan … quietly #nlpoli

These days, you have to hunt around the government website to find the provincial energy plan.  That’s despite the claim on the website – once you’ve found it – that the 2007 document “guides and defines Newfoundland and Labrador’s vision for energy resource development”.

The first pillar of that policy is something called “equity ownership.”  It’s right there on page 18:

Taking equity ownership in projects to ensure first-hand knowledge of how resources are managed, to share in that management, to foster closer government/industry alignment of interests and to provide an additional source of revenue.

Pretty clear?

Muskrat Falls: delayed dividends, more equity needed #nlpoli

The provincial “mid-year” financial update included a familiar claim about the Muskrat Falls project:

We estimate that the province will see revenues in excess of $20 billion over 50 years beginning in 2017, with average annual revenues of $450 million over this period.

But a new analysis of the project cash flows by JM shows that it will be 2031 before the provincial government will realise any genuine dividends from the project.  What’s more,  it will be sometime around 2048 before the dividends would reach as much as $200 million.

That’s not all.  The provincial government will have to inject upwards of $100 million over and above any amounts described to date in order to maintain the debt-service coverage ratio (DSCR) of 1.4 during the first five years of the project as required by the federal loan guarantee.

When you consider the equity repayment, the required debt service ratio, and include the potential upside from power exports, Muskrat Falls will be in operation for nearly two decades before the net returns to the Government of Newfoundland will match that presently provided by the Upper Churchill. This statement is one which is not fully understood by even the most buoyant supporters or sharpest critics of the Muskrat Falls project. [page 2]

Hebron failure: notes and observations

The Newfoundland and Labrador oil industry is reeling in the wake of news today that the Hebron development collapsed in the face of demands from Premier Danny Williams that the provincial government be given an equity position in the deal.

While little had been said of the negotiations coming down to the April 1 deadline, some had expected Williams to sign a deal. Instead, it appears Williams stood by his demand for an equity position. The companies were known not to favour involving the provincial government in management decisions on the project, even after Williams lowered the percentage he sought.

Williams singled out ExxonMobil as opposing the equity position, however it is likely several of the project partners had difficulty with Williams' demand. This was based on their experience with government involvement in the costly Hibernia project.

In an interview with CBC television's Here and Now, Memorial University economist Wade Locke described the royalties from Hebron - estimated at upwards of $10 billion over the life of the project - as being greater than the provincial government royalties from the other three fields in production combined.

Based on oil at US$50 per barrel, the 700 million barrel Hebron-West Ben Nevis-Ben Nevis development would be worth US$35 billion. The provincial royalty position Williams rejected represents 28% of the project's total potential revenues.

According to lead partner Chevron Canada, Hebron would have been the second largest development offshore Newfoundland and Labrador. Reserves are estimated at 400 to 700 million barrels, with development costs to first oil estimated to range as high as $5.2 billion. Under the operating agreement, the Hebron partners committed to use a gravity-based structure as the production mode. The fractured nature of the fields coupled with the heavy nature of the oil combined with the needed production mode to increase development costs.

NOIA, which represents the province's service and supply sector, predicted downsizing and shifts to business outside the province in the wake of today's decision.

"With a Hebron project delay," said Deirdre Robinson Greene, NOIA's director of communications and policy. "NOIA members have told us that they see reduced business opportunity and activity in their own back yard. If they are to continue operating, they have to look to other markets. That could mean anything from re-tooling for export, to re-locating, to perhaps re-deploying resources and workforce elsewhere. That all translates into less business and fewer jobs here in Newfoundland and Labrador."

In a scrum with reporters today, Williams accused the oil companies of not bargaining in good faith. He said the negotiations collapsed when the proponents sought an investment tax credit of 15% which Williams called unprecedented, as well as a tax exemption for fuel used on the project. Williams estimated the total value of these exemptions at $400 million.

If this figure represents a total cost versus an annual cost, there is no indication why Williams found this amount unacceptable while later in the same media scrum, Williams said the government was willing to spend the same amount to "take out" ExxonMobil from the project.

Williams repeated similar comments in the House of Assembly. He compared the province's demand for an equity position to the 8.5% stake that the Government of Canada purchased in the Hibernia project in the early 1990s. it is unclear whether Williams was prepared to purchase an equity position as the Government of Canada had done.

There is, however, an inconsistency in Williams' contention that one one hand the province was unwilling to forego less than half a billion in revenue in exchange for $10 billion while later claiming the provincial government was willing to purchase ExxonMobil's interest for the same amount. ExxonMobil owns 38% of the Hebron project, a share worth considerably more on the face of it than $500 million.

At no point has Williams described his goal in achieving a so-called equity position, nor has he indicated the benefits that would accrue to the province from an equity position, versus increased royalties. Williams has not indicated if his version of "equity" consisted entirely of cash or if it involved management rights.

Under the Atlantic Accord (1985), the Government of Newfoundland and Labrador collects revenues from offshore oil and gas as if the resources were on land. Williams did not explain today why he was prepared to reject $10 billion in royalties, plus billions in start-up construction benefits apparently for a cost of $400-$500 million in tax concessions.

Ed Byrne on PetroNewf and the equity position

Atlantic Business Magazine has a great oil and gas supplement in the current issue, including an interview with provincial natural resources minister Ed Byrne.

Check out the Byrne interview at atlanticbusinessmagazine.com, but here are a couple of excerpts.

On PetroNewf, that is having Newfoundland and Labrador Hydro get into oil and gas:

Over the last year and a half we have moved Nnewfoundland and Labrador Hydro and the Department of Natural Resources, particularly the Energy Division, to more of an integrated approach with each other, particularly on the bigger files and the big public policy issues. We'’ve moved Hydro towards an energy corporation that could potentially participate in the oil and gas play, both offshore and onshore.

...

ABM: Are you turning Hydro into an oil company?

MINISTER BYRNE: No, we'’ve talked about Hydro becoming more of an energy corporation that moves beyond what it has traditionally done in building dams and burning oil.

ABM: Like doing seismic work and drilling in the offshore?

MINISTER BYRNE: I'’m not sure that'’s where it'’s going. But certainly if there'’s a legitimate business opportunity that will provide a benefit to the province and revenues to Hydro, and thus to the province, we won'’t turn anything down. But all that is being assessed and we are at the ground floor of that right now.

On the equity position in Hebron Premier Danny Williams is apparently making a condition of any development agreement for the last offshore oil field:

ABM: Do you see Hydro taking an equity stake in Hebron?

MINISTER BYRNE: That'’s a public policy position we'’ve laid down that as a province we'’d like to have some equity stake in the emerging oil and gas industry, not unlike what'’s happened in Norway, not unlike what'’s happened in other jurisdictions in the world. Those are some of the things up for discussion right now.

...

From our point of view, equity is important from this perspective: it puts us at the table and helps us develop an intellectual capacity that doesn't necessarily exist within the provincial structure right now. It puts us in the seat as a legitimate bona fide partner in developments. It helps us gain further insight, expertise and knowledge into the oil and gas industry. It has worked successfully as a model in other jurisdictions and there'’s no reason to think it wouldn't here. Other jurisdictions are both equity partners and royalty partners. So while there is some legitimacy in saying that equity is represented by royalty, there are other benefits associated with being an equity partner.

Masters of our domain: national and international reaction

1. Financial analysts are reacting favourably to news of a pending deal to develop the Hebron oil field offshore Newfoundland.

From the National Post:

For producers like project leader Chevron Corp., as well as Exxon Mobil Corp., Petro-Canada and Norsk Hydro, the good news is that the basic royalty rate remains unchanged at 1% until costs are recovered, UBS analyst Andrew Potter told clients in a note. Previously, this rate increased progressively from 1% to 7.5%.

The bad news: A “super royalty” of 6.5% of net revenue after payout (when oil prices are above US$50 per barrel) has been included.

Mr. Potter thinks the new deal is fair to both parties, adding that these fiscal changes will not make a major difference.

For Petro-Canada (PCA/TSX), the government acquisition values Hebron at $1 per share, in line with the analyst’s revised net asset value for the project. His previous estimate was approximately $1.40 per PCA share, but this was been reduced due to higher capital costs and a later start date.

Note that industry analysts consider it positive that the provincial government's royalty rate has been set at a flat 1% until payout.

Note as well the valuation of the share price in the project. The delay in the project and higher capital costs had the effect of devaluing shares from CDN$1.40 to CDN$1.00.

2. Editorial opinion at the Edmonton Journal holds there may be a lesson in Hebron for Alberta Premier Ed Stelmach who, the newspaper contends, should seek a greater provincial return from the oil industry.

3. Chevron Canada president Mark Nelson told the National Post the provincial government equity position is simply a different way for the provincial government to collect its revenue. That may be a clue that the secret memorandum of understanding contains little if any management power for the province's newly minted energy corporation.

The equity stake comes with an acquisition cost of CDN$110 million, plus potentially up to $540 million in development costs. Potential gross revenue from the 4.9% share would be $2.45 billion over the 25 year estimated lifespan of the project, assuming an average price per barrel of $70. At $50 per barrel, the gross revenue would be approximately $1.5 billion. The cost estimate does not include any other undisclosed liabilities.

4. The Globe and Mail's energy reporter includes some interesting information in his latest story, but concludes with a bizarre claim that the equity position costs may affect the province's entitlement to Equalization:

On the face of it, Mr. Williams's [sic] insistence on an equity position in Hebron could reduce the government's revenues in the medium term, which could make it more likely it would once again receive equalization payments. That's because the Premier has given Newfoundland and Labrador Hydro a mandate to invest heavily in oil and gas and other energy projects - a policy that will divert revenue from general government coffers to the Crown corporation.

Newfoundland and Labrador will no longer qualify for Equalization in the 2009-2010 time frame without Hebron. Under enabling legislation, the newly minted energy corporation is empowered to borrow up to $600 million to finance its operations. As such, there is no diversion of revenue from provincial government coffers.

5. Reaction from some in western Canada's oil patch is mixed, as Report on Business indicates:

Peter Linder, managing director with DeltaOne Capital Partners Inc., said Newfoundland's reputation as a place to do business will get a boost with the Hebron deal but questioned why the province felt it needed an equity stake, given that it owns the resource and would collect a royalty.

"As long as they get their fair share through royalties, why do you need to own equity? I think the equity for Newfoundland is strictly politically motivated."

6. The Chevron/Hebron story made the New York Times. The Times story refers to a royalty base rate of 30%

The tentative pact with the oil companies, he added, also includes an extra 6.5 percent royalty, on top of a 30 percent base rate, and removes the special investment tax credits that the oil industry had demanded.

That version turns up in many of the financial reports. One implication is that lowering royalties at the front end of oil development may be part of a longer term government policy to increase the attractiveness of the local offshore.

Providing an equity stake without management powers might actually minimise the potential total cash cash outlay for operators while helping to defray costs among the operators at the front end. Coupled with a lower royalty regime, the local offshore could become more attractive to investment.

-srbp-

Danny and Jerome! on Muskrat Falls financials #nlpoli

Former member of the House of Assembly and Newfoundland and Labrador Hydro director Danny Dumaresque made the news over the weekend with a claim that he had a document showing that the provincial energy corporation had no luck raising $4 billion in the money markets.

On Monday natural resources minister shot back with the claim that  - according to VOCM - that the document Dumaresque had was a hypothetical situation drawn up by Nalcor itself.  VOCM also reported:

Kennedy says the project has been well received and he doesn't anticipate problems with funding.

He said.

He said.

Sort of.

What Dumaresque was referring to, most likely, was information that is also contained in an answer Nalcor provided to the public utilities board last week. Unless Dumaresque’s got something else,   this is really just part of the analysis of options that Nalcor ran.

At the same time, it isn;t something that you can just blow off with the Chip Diller assurance that everything is just fine.   As you’ll see below,  there’s a lot more in this particular bit of information than might meet the eye.

Here’s the entire document filed with the PUB with some notes and comments in between to help you understand what it is all about.

Consumer Question: In the reply to PUB-Nalcor-1 46 regarding a cost of service (COS) price for Muskrat Falls power in year 1, Nalcor states that an internal rate of return (IRR) of 8.4% was used "On this basis the cost of service in year 1 would be $214/MWh".

“Cost of service” is the usual way that the utilities board prices electricity.  As the province’s natural resources department website puts it:

Legislation directs the PUB to use cost of service methodology to derive rates, allowing an appropriate rate of return on a rate base of allowed costs. The PUB determines the allowed rate of return according to financial market conditions.

$214 per megawatt hour translates to – take a breath – 21.4 cents per kilowatt hour.  Go get your ‘lecky bill if you need to see that you are paying about half that rate right now for what you get.  When you stop hyperventilating, read on.  The question continues:

(a) Is the cost of the TL [transmission line] from Labrador included in the $214 /MWH?
(b) If so, provide a breakdown of the $214 /MWh cost between the Muskrat Falls site and the TL.
(c) Provide the in service capital costs (separately for the Muskrat Falls site and for the TL) used to calculate the COS $214 MWh year 1 price.
(d) Please provide a breakdown on debt/equity ratios/interest rates/return on equity used for the $214 MWh cost (separately for Muskrat Falls site and TL).(e) Instead of using the 8.4% IRR, can Nalcor provide the COS Muskrat Falls power price in year 1 (for the Muskrat Falls site plus TL) using the same assumptions as used for TL COS pricing regarding debt/equity ratios same interest rate for debt and the same return on equity)?

Now comes the answer:

A. (a) The cost of the Labrador Island Transmission Link is not included in $214 /MWh provided in response to PUB-Nalcor-46. The cost of service price in year 1 of operations is based on an 8.4% return on equity coupled with the sales profile for the Island to be comparable to  Nalcor’s alternative pricing model for Muskrat Falls of $ 76 /MWh ($2010, escalating at 2% annually).
(b) Please refer to Nalcor’s response to (a) above.

So right away, Nalcor confirms that the 21.4 cents per kilowatt hour they have already given as the cost of service pricing does not include transmission.

(c) The in-service capital cost for Muskrat Falls assuming an AFUDC rate of 8.4% is $3.6 billion. 

This part is a bit technical but here’s what it says.  If you use a method called “allowance for funds used during construction” or AFUDC then the cost of the dam at Muskrat Falls is $3.6 billion.

(d) The key financial parameters used in the calculation of the alternative cost of service for Muskrat Falls were 100% and an 8.4% return on equity in order to maintain comparability with Nalcor’s pricing approach and model.

Maybe that’s clear to super-duper insiders but when they asked for a group of ratios, Nalcor gave them two.  The 8.4% is clearly identified as the return on equity or profit. 
But what’s the 100%?  Good question.

(e) In an escalating supply price analysis framework, leverage of 75% debt is not finance able because the initial low sales volumes and associated revenues would result in  inadequate debt service coverage as required in capital markets. During the first 6 years of commercial operations there was insufficient cash flow for debt servicing as the debt service coverage ratio was below 1.0. For years 7 through 12, the debt service coverage ratio was below the minimum threshold of 1.4 times recommended by Nalcor’s financial advisors.

Here’s the fun bit.

This paragraph tells you that Nalcor’s analysts ran a scenario in which they borrowed 75% of the money they would need.  They also included – apparently – an entirely new pricing scheme for Muskrat Falls that would see Nalcor pass on to consumers only one third of the actual cost of producing electricity and shipping it to them.  Those costs would have to be made up somewhere else, even if they weren’t coming directly from residents of the province as ratepayers.

That’s why they keep talking about an “alternative” pricing scheme.  Presumably they’d have to change legislation to get this in place but that’s really just the tip of the very big financial iceberg that neither Nalcor or the provincial government will discuss publicly.

In any event, when Nalcor and its advisors ran the scenario using the projected sales in Newfoundland only, Nalcor could not make enough money in the province to service the debt for the first six years after construction. 

For the second six years they made a bit more but not enough to hit the minimum recommended by Nalcor’s analysts.

Another thing to note here is that  we’ve been assured all along that this project made financial sense and that it would produce a “revenue stream” that would the project.

Yeah well, that didn’t turn out to be true.  For one thing, there are no export sales for any of this power.  The project is supposed to come entirely from provincial sources. And as this analysis shows, Nalcor couldn’t make the thing fly – even hypothetically on paper – using some favourable assumptions and a pricing scheme that was designed to make the project work.

- srbp -

Harper wants equity stake in Lower Churchill

According to the Globe and Mail, the federal government is considering an equity involvement in the Mackenzie Valley pipeline but has ruled out direct subsidies and loan guarantees as a way of helping the costly venture along.

For its part, Imperial Oil is just saying a polite "no" to equity stakes.

Meanwhile, Imperial is having trouble getting the permits needed to build the project. The problem is not with the company but with the federal government's inability to make appointments to four boards that must oversee the permits.

The permits are just one issue affecting go-ahead with the natural gas pipeline that is estimated to cost $7.5 billion to construct.

But here are a couple of observations on this issue and how it relates to Newfoundland and Labrador:

1. No one else wants to be President of Parador... except Danny Williams.

Some people compare Danny Williams to Hugo Chavez. I say the comparison is more like Danny Williams and Adolphe Simms, except Williams is not an actor playing the role.

Too bad.

Then maybe he could take some advice.

But I digress.

The equity stake discussed in the Mackenzie Valley pipeline stories linked above is being considered purely as a means of providing financial support to the project. Williams has just loaded the whole concept with so much emotional baggage he has actually managed to sink Hebron for years and may well have further discouraged any further development offshore, let alone exploration.

2. Regulatory Boards are important. Note that this project is being held up because the government involved can't sort out its appointments to the regulatory boards involved.

The board regulating the local offshore did quite well despite being set back in its timelines as the Premier demonstrated not only his political impotence but also - apparently - a doubtful ability to read and comprehend the law through the Andy Wells fiasco.

Maybe Jim Bennett could have asked Danny for advice on how to handle having as Supreme Court justice toss your arguments out the window as so much codswallop.

Anyway...

Regulatory boards are a key part of the system. The feds need to get that boards issue sorted if they want the Mac pipeline to proceed. Around here, things might have gone much more smoothly if Danny Williams had let the original selection process proceed, rather than try to put in the fix on Hebron using Andy Wells.

3. Kiss the Lower Churchill goodbye too... unless.

The federal government - the current one - has no interest in provided loan guarantees to megaprojects let alone megalomaniacs trying to run megaprojects.

Stephen Harper has been perfectly consistent on this point.

Just recall what Harper actually said last winter, instead of what Danny Williams told you Harper said.

Harper actually said he was prepared to support the Lower Churchill in the same way the feds supported Hibernia. This is how he put in the formal reply to Williams' wish list during the last election. Since Danny places so much stock in the written word - when it is convenient - then here are the words, as written by Harper:

A Conservative government would welcome discussions on this initiative and would hope that the potential exists for it to proceed in the spirit of past successes such as the Hibernia project.

So here it is: On its own, Newfoundland and Labrador does not have the financial ability to float the loans needed to construct a $9.0 billion megaproject.

It needs partners.

The only way the feds will help is in the form of an equity position.

Meanwhile, Hydro Quebec is moving ahead with its own megaprojects that will likely start construction and achieve first power well before the Lower Churchill, even under the most optimistic situation. They stand a good chance of getting capital and the markets that would otherwise go to Lower Churchill simply because the provincial government here miscalculated yet again on a big economic project.

So the issue for Danny Williams comes down to this: is he prepared to let Stephen Harper acquire an equity position in the Lower Churchill project that would let Williams build the project at all?

Is he prepared to treat the Government of Canada just like Altius, for example, which is seeking an equity stake as well?

The one thing that doesn't seem to be in question:

There'll be no federal loan guarantees for the Lower Churchill, at least not under a Harper government. And without the federal government's deep pockets, there won't be a Danny Williams monument at Muskrat Falls and Gull Island.

Hebron, the Lower Churchill and Local Benefits #nlpoli #cdnpoli

Apparently, this whole Hebron work thing is much ado about nothing.

Premier Kathy Dunderdale spent some time Monday afternoon chatting with On the Go’s Ted Blades about a recent decision by Kiewit to take a pass bidding on a second topsides module for the Hebron project.

Labour was tight. The company was having trouble delivering on time and on budget.
 
At one point, the Premier said there would be more work.  The size of the topsides has apparently gone from the original estimate of 11,000 tons to 18,000 tons.

So, sez the Premier, there’ll be 18,000 tons of work.

You know, that’s something that always puzzled humble e-scribblers.  When people say there’s tons of work, now you know what they mean.  Don’t look for the number of people on the job.  Forget the number of hours of labour.

Work now is measured in tons.

You cannot make this stuff up.

You wouldn’t.

You’d be afraid to make something like that up because people would never believe that the Premier of the province could say such a thing.

But she did.

Dunderdale also tried to claim that the crowd what has been running the place since 2003 were the first ones to copper-fasten the amount of work to be done locally on an offshore project.  Others, she said, had settled for “best efforts.” 

Kathy didn’t say copper-fasten but that’s one of her favourite little bits of meaningless jargon.  Like referring to something as a piece.  Like the Hebron piece.  Or the Kiewit piece.

But anyway, first time for nailing stuff down right to the gram or work that had to be done in the province.

All that would be wonderful, of course.

Splendiferous even, except that it isn’t true.

Construction of the gravity base for the project was always going to be done in Newfoundland.  That’s the cheapest way to do things.  The provincial government didn’t get anything there they didn’t already have going into the meeting.

And then there is a bunch of small time stuff like a tube called the flare boom. Low tech metal bashing, for sure, and again, nothing of any difficulty to get done in someone’s back yard welding shop.

But the topsides modules, utilities and process module and other big stuff covered in Sections 5.5 B, C,and D of the benefits agreement, well those are all subject to conditions. The conditions are secret. They are considered to be commercially sensitive.

They are not copper-fastened at all.

As for the rest of the project, the Hebron final agreement has more than a few give-aways in it. 
The companies got a huge break on financing research and development.  Kathy and her former boss let the companies skate with a pittance of a cash commitment compared to what the offshore regulatory board rules required.

On royalties, Kathy and her old boss gave the companies a break up front as well.  Instead of an escalating percentage of revenue, Kathy and Danny gifted the companies with a flat one percent for as long as it takes to pay off the project development costs.

When Roger Grimes talked about such an idea, back when oil prices were forecast to stay low forever, Danny tore great strips off Grimes’ hide.  As it turned out Danny gave the oil companies a gigantic break when prices were high.  And Kathy Dunderdale totted out in front of the cameras to tell news media it was a way of giving the oil companies some protection against changes in oil prices.

Just think about that, in hindsight.  Back then  - in 2008  - Kathy was running to protect oil companies against the chance oil prices might drop. 

The poor old multinational multi-trillionaire oil companies. 

Too fragile to take the risk.

A couple of years later – in 2010 – oil prices were going to be high forever.  That is the justification for Muskrat Falls. And what about protecting taxpayers from the possibility oil prices might fall?  Out trots Kathy and then Shawn and now Jerome to say there’s no chance of that happening.

And so the taxpayers of Newfoundland and Labrador, the people who own the oil and gas and the water, having given the oil companies a break must now dig ever deeper into their own pockets to ensure their electricity prices are high. Nova Scotians, meanwhile, will get their power for free, except for three months of the year when Muskrat apparently can’t deliver the juice.

Not much of a local benefit in that. Sure,  Tory supporters will tell you all about what Danny got in exchange.  Like equity stakes.

Hang on a second.

Equity.

No small irony that the two big issues in the province are the Lower Churchill on the one hand and Hebron on the other.  Those equity stakes, including the one in Hebron, were always about one thing:  financing the Lower Churchill. Local benefits were entirely secondary. 

Don’t believe it?

Williams broke off Hebron talks in 2006 because he couldn’t get an equity stake.  Nothing else.  After 18 months of public pissing matches and private suck jobs, Williams  got a deal on Hebron. 

But he didn’t pick up any local benefits that weren’t already on the table in 2006.  The so-called super-
royalty won’t add much beyond what the province would have received under the same royalty regime that is delivering in spades on projects like Hibernia and Terra Nova and White Rose.

Equity was the thing.

The first thing.

The most important thing.

So important that Danny even told Arnold about it:

The Premier also discussed the province's Energy Plan objective of using non-renewable resource revenues to fuel a future based on renewable sources of energy.

At times like this, it is always interesting to go back and see what was running around at the time.  This time look at August 2007 and the rather convenient election announcement of a Hebron deal:

6. Shortage of workers means shortage of work.   

In the last round of negotiations, the provincial  government insisted that any work that could be done in Newfoundland and Labrador had to be done there or the companies would pay a penalty. Reportedly, the companies noted that Long Harbour plus the Lower Churchill would outstrip the local labour and engineering pool making it almost impossible to complete Hebron using only local resources.

Cancellation of Hebron last year meant that workers who would have started work on Hebron have already headed west to the higher wages of Alberta. That made the predicted situation worse, not better and therefore will make it harder for the province to stick with that bargaining point. 

Expect that provincial demand to drop off the table or for Hebron to get preference over the Lower Churchill. Otherwise, the cost of the project will be forced up.

Your humble e-scribbler had plenty of people from the local oil and gas community point that out.  The companies talked about labour force shortages and costs, they said. The final Hebron agreement reflected the limited capacity in the local market to do some of the bigger components for Hebron.  The only things the companies had to do here was what they absolutely had no choice but do here.

Not surprisingly, that old demand for guaranteed local benefits or suffer a penalty disappeared.

And equally unsurprisingly, the provincial government’s news release talked up the GBS and the small stuff – “outstanding local benefits” – but only after they played up the equity.

Makes you wonder why Kathy Dunderdale is talking about Kiewit and Marystown like it was some kind of surprise to her.  She’s known about the whole thing from the beginning:  Hebron, the Lower Churchill, jobs, local benefits and the equity.

The equity.

It’s always been about the equity. That’s what ties it all together.

- srbp -

Waiting for the "real deal": deconstructing the Hebron announcement

"That's the details...That's where the deal gets done. That's where the off-ramps are. That's where the security is for the people of Newfoundland and Labrador. ... We want to see the real deal."

Danny Williams, Leader of the Official Opposition, June 2002

At 10:00 AM on August 22, 2007, Premier Danny Williams will hold a news conference and announce a miracle.

[Update 0745 hrs 22 Aug: According to CBC Radio's David Cochrane, the news conference will take place at 11:00 AM or noon. Bond papers understands it will involve only Premier Williams. As Cochrane indicated, there is no final and binding legal agreement but rather a general statement of principles (see below). Cochrane compared the situation to Voisey's Bay (again, see below), and acknowledged that there may not be an agreement reached. Cochrane dismissed the prospect given that both sides need a deal.]

The Premier will announce a deal to develop Hebron in which he negotiated every single one of his demands successfully at no or virtually no cost.

The reality is starkly different, if for no other reason than what the Premier is likely to discuss on Wednesday is not a complete agreement but rather a memorandum of understanding [MOU], a statement of principles to guide further talks that in itself is not legally binding on either party. According to some indications, the MOU will be kept confidential.

The details of the development agreement for Hebron remain to be negotiated.

The Hebron announcement will be starkly different from the position Danny Williams took as opposition leader in 2002 on the Voisey's Bay deal, although the circumstances are virtually identical.

As a Canadian Press story put it in June 2002:

But critics on the opposition benches warned a monumental bungle is in the making because the vote [in the House of Assembly] dealt with an 18-page statement of principles, not a legally binding commercial agreement.

"It's the worst ... document I've ever seen," Conservative Leader Danny Williams said outside the legislature. "It's not even a legal document because it's not legally enforceable. We as a people are being insulted by being asked to vote on this."

The legal text, which could comprise up to 150 pages of dense terminology, will be drafted by lawyers behind closed doors later this fall.

For the past nine days, Williams insisted the final text, not statement of principles, should be debated and put to a vote in the legislature.

"That's the details," he said. "That's where the deal gets done. That's where the off-ramps are. That's where the security is for the people of Newfoundland and Labrador. ... We want to see the real deal."

Effectively, Newfoundlanders and Labradorians will be voting on a Hebron statement of principles come October 9 but without the details which, as Danny Williams himself put it five years ago, is "where security is for the people of Newfoundland and Labrador."

It would be even more ironic - if that is even possible - were the Premier to make a comment along these lines on Wednesday: "We're completely satisfied we have all of the provisions that we need, all of the stop-gap measures, all the guarantees."

To give a sense of what likely won't be known on Wednesday with any certainty, consider these points:

1. Super-royalty: There will apparently be a provision covering special royalties while oil is priced above a certain dollar amount per barrel. There has been no public discussion of how this would work and hence there is no calculation of how this regime will interact with the other royalty regime.

It is conceivable that the province's existing royalty regime has been supplanted by an entirely new one - never publicly disclosed - complete with different triggers, different calculations and therefore different potential cash values to the provincial treasury.

Wade Locke's assessment of Hebron royalties of $8.0 to $10.0 billion over the 20 year lifespan of the project may well need to be replaced by an entirely new set of calculations.

Unless details of the royalty regime are released, there will be no way for an independent analyst, such as Locke, to assess any provincial government claims about royalties.

2. Equity stake. There will be a 4.9% equity position for the provincial energy company, according to media reports. Expect the provincial government will pay a fair market price - yet to be determined - for the stake and that the energy company will also bear its share of project development cost and downstream liabilities.

Those points have been at the heart of the oil companies' position on equity. The Premier has essentially accepted them already publicly when he stated that the provincial government would pay fair market price.

The problem for the public will come in assessing the real value of the equity stake. Premier Williams gave it a net value of only $1.5 billion over the life of the project based on discussions up to April 3, 2006. It is possible that in accepting operator risk - something the province has eschewed until now, apparently - the net cash value of the equity stake will be near zero.

The Premier has never publicly indicated any other value to the province of the equity stake and establishing an oil company.

[Update: CBC's David Cochrane attributed to Premier Williams acquisition cost of $150 million to the equity position. On the face of it, this is ridiculously low. If Hebron development cost were $5.0 billion, then 4.9% of that alone would be $245 million.

Added to that cost must be the share of other downstream costs and liabilities. If getting into the oil business on a project like Hebron - estimated gross value of US$25 to US$35 billion- was that cheap, everyone would be in it. ]

3. Local benefits: One of the major issues in the 2005/06 negotiations was apparently the amount of work to be done within the province. This remains an significant issue, made more acute by outmigration since April 2006.

Any provisions of the agreement which establish local benefits as work commitments must take into consideration the local labour market and the local industrial capacity in the context of a major construction project at Long Harbour, the likelihood that the Lower Churchill will start within the next three to five years, and the possibility that one or two other major construction projects at the northeastern end of Placentia Bay would also tax the local industrial capacity.

One way of coping with the issue would be to allow work - such as the topsides - to be shipped out of the province for completion based on certain conditions being met. As well, the provincial energy company may opt to slow work on the Lower Churchill or allow that project to export components or outsource supplies to ensure that Hebron can meet its first-oil target.

Since there are a limited number of facilities in the province capable of constructing some of the larger project components, a project such as the Joint Support Ship for the Canadian navy, might take a facility such as the Marystown yard out of contention for one or the other project.

The superheated Alberta construction marketplace has already taxed some aspects of the national labour supply. Challenges would exist in finding enough skilled workers in a relatively tight time frame to complete the planned and potential major projects across Canada, including the ones listed above.

4. Conflict of interest: Bond Papers raised this issue specifically focused on Ed Martin, the chief executive of Hydro who headed the 2006 negotiating team. The conflict remains, even though this round of negotiations appears to have been headed by the Premier himself.

Fundamentally, any political demands that insist on work being done in the province have to be paid for by some party.

Given that the provincial government is almost certain to become an operator, it is now faced with the dilemma. As an operator, it would seek to lower costs and thereby maximize profit which would flow ultimately to the provincial treasury. As a provincial administration interested in maximising local work, it would seek to maximize that local work irrespective of costs.

Until now, those interests were aligned: lower costs meant higher royalties.

Beginning with this agreement - when and if the details are finalized - the provincial government faces an internal conflict of interest not seen since the Peckford administration and negotiations on Hibernia.

How that conflict is resolved will determine much of the value of the final agreement, when and if it is reached.

5. There has been no public discussion of potential research and development work related to Hebron, let alone what the requirements might be.

6. Tax concessions: One sticking point for the provincial government in 2006 was a demand by the companies for a sales tax exemption for the construction phase of the project, similar to an exemption granted to Hibernia, as well as the creation of an investment tax credit.

Tax concessions - although not characterised as such - might form a part of this agreement as a mechanism to lower operator costs on an already difficult and costly project.

7. Dates and timelines. Some 18 months have already been lost on the project. The operators disbanded the project management team in 2006.

That team now must be assembled again.

The details of the agreement with the provincial government must be negotiated.

A development application must be submitted to the offshore regulatory board. The board must review the application, adjust portions and hold public hearings before the project can be sanctioned.

Even allowing some concurrent work, it is likely that first oil from Hebron will not be achieved much before 2014.

8. Hibernia South. As much as the parties attempted to downplay it, it appears that the provincial government's rejection of Hibernia South development was linked to collapse of the Hebron talks.

Some aspect of this MOU may include a side agreement to expedite development of Hibernia South, with the province essentially abandoning any demands for additional royalties and developments from the 300 million barrels of oil in the Hibernia extension. Hebron - the subject of the current discussions - is estimated to contain slightly more than 500 million barrels of heavy, sour crude oil.

-srbp-

Conoco drilling delayed in Laurentian until at least 2009

According to The Telegram, ConocoPhillips won't be drilling exploratory wells on its Laurentian basin properties until at least 2009 because of rig availability questions and problems in completing seismic surveys.

In addition to the global demand for deep water drilling rigs, the geology of the area is posing problems for seismic interpretation.

Seismic surveys are used to map what lies beneath the ocean floor. Waves of compressed air are shot toward the seabed, and the signal reflected back creates an image of rocks and pools of oil and gas that are found kilometres below the ocean floor.

In the case of the Laurentian surveys, the pulse bounced back multiple times and the images were unclear. What might have taken 10 months to evaluate took 18 months to clean up the images.

"The Laurentian Basin is an absolute frontier basin. There are no wells in the deepwater portion of that basin," said Hogg. "We are in our infancy in understanding the basin."

The Conoco land parcels are in water as much as 2,200 metres deep but only as shallow as 1100 metres. That puts them on par with the Orphan Basin and large portions of the Gulf of Mexico where the Jack 2 field was recently discovered. Even if commercial quantities of oil and gas are confirmed, the water depth involved would pose a challenge for current technology to exploit profitably.

Those practical challenges are one of the most potent arguments against any facile approach to land management such as fallow field that would demand development within as little as five or 10 years by a company or face expropriation. When it was originally discovered, Hebron was considered commercially non-viable since its heavy oil (circa API 21) and fractured structures posed significant problems for then-extant engineering and oil extraction ability. Only changes on the technical side coupled with changes in world oil demand made the project commercially viable some 20 years after it was discovered.

A Conoco spokesman also told the Telegram that

the company will continue to work with the province as it develops the royalty regime.

"That being said, it is important to us to have the royalty (regime) before we drill the well."

Premier Danny Williams told the Financial Post in an interview on Friday that the provincial government is working on a new oil and gas royalty regime. Key components of both will be a so-called "equity" position for the provincial government through its Hydro corporation.

Mr. Williams said the energy policy will require provincial equity stakes in both future oil and gas projects, but wouldn't reveal how much, other than it will be higher than the 4.9% negotiated for Hebron.

It will also include a natural gas royalty regime, which has also been expected for years, and cover environmental requirements and the electricity industry.

The gas regime has been completed and has been shared for feedback with Husky and ConocoPhillips Co., Mr. Williams said.

Unconfirmed reports put the equity demand at 10%. That could mean little to Husky, which is seeking to develop gas prospects on its White Rose project and which would be grandfathered through the equity provisions of the regime.

For companies like Conoco, however, such a demand, especially when the financial implications are still far from clear, could further delay exploration. Both Williams and his close associates have stated that the provincial government would pay for an equity position. They have yet to explain how the provincial government, supposedly labouring under an enormous debt burden, would find the hundreds of millions of dollars such a stake could cost. Nor have they stated how an equity position would provide any financial or other benefits to the province beyond the huge returns already received. Williams has consistently denigrated existing royalty regimes despite their delivering over 25% of the provincial government's own-source revenue.

if the province's royalty regime raises the cost of exploration and development beyond the company's profitability on a frontier field, Conoco's drilling program - now forecast for 2009 at the earliest - may well be pushed back further into the future.

-30-