The Husky Boys' Challenge #nlpoli

The Husky gambit last week presents the province’s leaders with a fundamental challenge.  Do we continue on the current path or do we change?  This is not just a question of oil development versus some nebulous, pseudo-intellectual gibberish called “decarbonization”.

It is the question from 1984:  who will control the Newfoundland and Labrador offshore and with it the future of the province itself? 

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Husky is in such serious financial trouble that the company is thinking about walking away from established, profitable fields offshore Newfoundland and a project to expand one of them that is already more than halfway to first oil.

That is precisely what the company announced last week.

In a statement, the company said that delays in the West White Rose project caused by COVID-19 and what the company described as “market uncertainty” left it “no choice but to undertake a full review of the project and, by extension, our future operations in Atlantic Canada.”

What is most striking about the statement is that Husky acknowledges all the reasons why White Rose and the extension project are attractive financially now and in the future:  the field produces “light crude oil at low incremental cost and with lower greenhouse gas emissions intensity than other North American crude oil projects.”

In comments to media,  Husky CEO Rob Peabody said that the project’s fundamentals remained attractive.“

The common local reaction to this news was, in every respect, predictable.  The local oil industry association, headed these days by former finance minister Charlene Johnson, wants the federal and provincial governments to spend unlimited billions in tax incentives and bailouts to prop up the industry at the levels before the market down-turn that started before COVID hit. 

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.

Williams concedes on royalties (2007) #nlpoli

As Bond Papers noted on Thursday, part of the Hebron deal will involve a change to the provincial royalty regime local media are characterising as a concession.

The Telegram reported on Friday morning that the province will indeed lower the initial royalty to a flat 1% on gross from an escalating regime that maxed at 7.5% until the project recovered its initial development costs.

After that, royalties jumped to a combined 305 in two separate tiers. After simple payout, provincial royalties were based on net profits which provided the companies with a rate of return allowance.

Under the royalty regime for Hebron, the province will collect 1% for as long as it takes the project to recover start-up costs.

Thank you, Danny Williams #nlpoli

Rob Strong has been a key player in the local oil and gas industry pretty much since the earliest days.  He knows what he is talking about.

Strong pointed out to VOCM on Wednesday that the Hebron field won’t be the cash cow for the provincial government some people hoped/pretended it would be.

Analyst Rob Strong says he fears that on the front end of a project, that will have a 25 year life, this province won't reap any benefit for being a partner in the development.
Strong says when oil was at $100, Hebron type crude was being discounted by $35. He says that means in the short term, the picture does not look as bright for Hebron owners. This province has a has a 4.9 per cent share in the development.

What Strong is pointing to is a deliberate cut in the provincial royalty offered as a gift to the oil companies by Danny Williams and Kathy Dunderdale in 2007.  Dunderdale, the natural resources minister at the time, said that she and Williams wanted to give the multi-national oil companies “some downside protection if the price of oil went very, very low.”

More ways to lose than win #nlpoli

“What this province needs is not just someone with the brains to figure out what's wrong with our economy,” future Premier Kathy Dunderdale wrote in 2002. 

“What this province needs is someone with the guts to start doing something about it for a change.”

Dunderdale’s letter to the editor of the Telegram appeared on April 1, 2002.  She was praising Danny Williams, not surprisingly.  The then-opposition leader had savagely attacked the government during debate in the House of Assembly on the annual throne speech.

No more give-aways, was their cry.

You can hear the words ringing in your ears all these years later.

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.

A troublesome and costly pattern #nlpoli

There are so many problems raised by Premier Paul Davis’ zeal to sign an agreement with Statoil for the Bay du Nord that it is difficult to know where to begin.

Perhaps the best place to start is with the deal announced the day before Davis’ oil news.  The provincial government gave $6.5 million in public money to an insurance company to establish a major corporate office in St. John’s. 

Newfoundland and Labrador got the company to move here by engaging in a bidding war with other provinces that were anxious for the business.  Newfoundland and Labrador essentially gave away the most.

That’s what happens when you bargain in a weak position.

A legacy of secrecy and bad deals #nlpoli

In response to questioning in the House of Assembly last Tuesday and Wednesday, natural resources Minister Derrick Dalley confirmed that the provincial government is in secret talks with Norwegian oil giant Statoil to develop a new field offshore Newfoundland.

There’s was nothing in the local media about it until the end of the week when the Premier appeared to chance his position on the talks.

The Telegram’s James McLeod wrote:

Premier Paul Davis says that when he told his natural resources minister to wrap up a major offshore oil deal by the end of the year, he didn’t really mean exactly that.

 

The Legacy of Faulty Assumptions: Hebron Revisited #nlpoli

Hebron is the last of the four, big, offshore discoveries from the 1980s.

It’s due to come into production in 2017 based on a development agreement reached initially in 2007 with the provincial government and finalised in 2008.  There’s a potential problem with current production schedule.  The topsides fabrication is delayed in Korea but we won’t know until the middle of 2015 whether or not there will be further delays that would impact the planned date for first oil in 2017.

Hebron plays a big role in the imagination of the people currently running the province.  Their reaction to the provincial government’s financial problems is based, in part, on the expectation that Hebron will bring huge amounts of new cash into provincial coffers.

But with oil prices down,  people are starting to consider that those assumptions about an imminent return to insanely fat oil royalties might be a bit off base.  With that in mind, let’s revisit the Hebron development agreement and see what turns up.

Hebron delayed at least 12 months #nlpoli

CBC news reported on Thursday that the topsides module for the Hebron project won’t be delivered on time. 

Rather than arriving in 2015 for mating with the concrete base,  the entire structure for the living, drilling, and support spaces won’t arrive until sometime in the middle of 2016.

The original project timelines called for the topsides to arrive in early 2015 for mating to the concrete base.  That would allow time to float the structure to the site,  fix it in place, and start drilling the production lines into the field.  The original plan called for first oil in early to mid- 2017.

The one year delay in topsides fabrication will likely mean a one year delay in first oil.  it’s hard to imagine how it could be any different.

-srbp-

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.

The Hebron Complications #nlpoli

The partners in the Hebron project sanctioned the development on New Year’s Eve and announced the decision on Friday.

The new cost estimate to build the gravity base and bring the oil field into production is $14 million.  As CBC noted on Friday, the capital cost estimate for the project increased from $8.3 billion to $14 billion over the past 18 months.  That’s a 69% increase for those doing the math.

“But much of the increase of billions relates to increased construction and drilling costs,”  CBC reported on Friday, “ plus current market and foreign exchange rates.”  The partners expect to produce first oil from the field in 2017.

How much was that principle in the window? #nlpoli

Sending the third topsides module from Hebron outside the province was “absolutely unacceptable” to Premier Kathy Dunderdale back in June.

She was “extremely unhappy” and vowed to “pursue all avenues available” to her in order “to ensure that this very important work stays in Newfoundland and Labrador.”

A few months later, the absolutely unacceptable has become completely acceptable.  The only question – as it turned out – was the price.

No deal likely on Hebron 3rd module #nlpoli

CBC’s got the story:

ExxonMobil will be able to move work related to the Hebron oil project out of Newfoundland within days, as the possibility fades for an agreement to use local fabrication facilities.

“We’re not making any real progress, and it doesn’t appear that mediation will solve the issue,” Natural Resources Minister Jerome Kennedy told CBC News late this week.

Kennedy can rattle on all he wants about what a great case he believes the provincial government had.

Talk, as SRBP noted in June, is exceedingly cheap.  When the provincial government signed the Hebron agreement in 2008 they were not concerned about local benefits at all.  They took what the companies had on the table and nothing more.  Ed Martin’s view as head of Nalcor seems to be the same view of local industrial benefits he held when he worked for Big Oil.

-srbp-

Provincial government working Hebron dispute outside terms of benefits agreement #nlpoli

Lots of words came from Premier Kathy Dunderdale and natural resources minister Jerome Kennedy in their dispute over construction of a major module for the Hebron project.

What became pretty clear – if you listen -  is that the provincial government is trying to squeeze some resolution to the dispute outside the provisions of the Hebron Benefits Agreement.

$#*! Jerome said: Hebron Benefits #nlpoli

Hear what comfortable words Jerome! sayeth, back when he was finance minister (December 9, 2008):

The $4 billion six-year plan is as much as we can handle right now along with the Vale Inco, Hebron, and then hopefully the Lower Churchill. So we are at capacity, there are not enough workers, and there is simply no way that we can do anything more with infrastructure right now.

-srbp-

More $#*! the Premier said: copper fastened Hebron Benefits #nlpoli

December 16, 2009

Mr. Speaker, their ignorance of this project is staggering, and what is frightening about it is they put this out like they are speaking the truth.

Mr. Speaker, we have commitments on a concrete gravity-based structure, a mechanical outfitting, 4.1 million person hours of work; topsides drilling support module; topsides drilling derrick; flare boom; helideck; lifeboat stations; structural steel riser components and assembly of offshore loading system components; riser bases; rigid risers; tie-in spools and buoys. We have 50,000 hours of GBS feed-phase engineering. We have detailed engineering. We have 1.2 million person hours of detailed engineering that have to be done here in the Province.

Mr. Speaker, the first time ever in a negotiation of an offshore project that these kinds of benefits have been negotiated and copper fastened to the benefit of the people of the Province.

Yeah. 

Right.

In hindsight, they must have been fastened with something other than copper.

-srbp-

$#*! the Premier said: Hebron Benefits #nlpoli

November 27, 2008:

One of the things that I am proudest of – I mean, the benefits that we negotiated under the Hebron agreement have never been seen in this Province before. They are so comprehensive and they are so detailed, but one of the things I am so proud of is the gender and diversity agreement. [Emphasis added]

In hindsight, that comment seems to be rather telling.

-srbp-

Looking beyond the Hebron sandbox #nlpoli

ExxonMobil drew a line in the sand this morning, and the minister and I are here to draw another line in the sand, as far as this project is concerned.

Premier Kathy Dunderdale, 21 June 2012

Premier Kathy Dunderdale and natural resources minister Jerome Kennedy spent more than a half hour meeting with reporters on Thursday to talk about the provincial government’s position that a major module for the Hebron project must be built in the province.

Take a look at the scrum video.  There is a lot of talk.  There is a whole lot of talk.  Some of it tough-sounding.  There are threats.

But there is so much talk, and so much rambling, and so many threats that most of the talk is unconvincing.

A closer look at the history and the agreements pulls you toward the same conclusion.

The Kruger Nexus #nlpoli

As an astute reader pointed out in a n e-mail Tuesday morning, the Hebron-Muskrat Falls connection is not really as important these days as the the connection between the future of the Kruger mill at Corner Brook and the plan to develop the Lower Churchill.

Manitoba Hydro International noted that connection in their review of part of the Muskrat Falls project for the public utilities board. In instance, a relatively modest change in the project cost coupled with the closure of the Corner Brook mill, erased the Muskrat Falls advantage:

Also, should the existing pulp and paper mill cease operations, and its generation capacity be available for use on the system (approximately 880 GWh), and should the capital costs of both the Muskrat Falls Generating Station and Labrador-Island Link HVdc projects increase by 10%, the CPW for the two Options would be approximately equal.

Nalcor has no export markets for most of the electricity from Muskrat Falls.