Tuesday, April 04, 2006

Atlantic Canada petroleum industry overview

In last month's Atlantic Business Magazine, I had 3 articles published in their regular petroleum supplement. As it turns out, while there's limited space in a monthly magazine, cyberspace is unlimited. In the interests in adding some information to this Hebron debate, I'm going to post my original articles as originally submitted. Some of these were edited for space for publication but here's the unexpurgated version.

Today is the article providing an overview of the Atlantic Canadian petroleum industry. In the days to follow is an article on generic royalty regimes followed the transcript by an extensive interview with Ed Byrne, provincial minister of Natural Resources.


Perfect Storm
New discoveries, global energy deficit and fortuitous location combine to fuel exploration and development of the Atlantic petroleum patch.

Seismic then drilling then Oil and gas exploration is the necessary precursor to the discovery of exploitable fields, development of petroleum projects and, ultimately, commercial production. If there’s no exploration today, then there will be no oil or gas coming on stream tomorrow.

Predominantly an offshore play with some onshore prospects, the Atlantic Canadian oil patch has overcome early challenges (notably, a harsh, ice-infested environment and dearth of petroleum infrastructure), evolved beyond the frontier stage and emerged as a solid producing region. Hibernia, once considered the poster-project for high cost- high risk development, now provides a stable and lucrative production stream. The subsequent projects - Sable, Terra Nova and White Rose - have further proved the region’s worth and driven development of on-the-ground capability and infrastructure that bespeak a healthy, growing oil and gas industry. Atlantic Canada’s journey to petroleum prosperity is well underway.

So, what steps are planned in the near future? What exploration and development is on the Atlantic horizon?

Newfoundland and Labrador

This province has developed the largest petroleum sector overall and has over $800M on the books in exploration commitments out to the year 2011. This year looks like another active exploration season, centered on three prospects. The goal is to break a 20 year dry spell of new offshore commercial discoveries.

Two years ago a consortium of oil companies bid a record $670 million to explore the Orphan Basin. Colder, deeper and further from land than the Grand Banks, this area could contain the region’s largest discovery yet. In July 2006 the Erik Raude will drill one well, leave for other commitments and then return in early 2007 to drill two more. The project is a collaboration between Grand Banks veterans Chevron (holding a 50 per cent share) and Exxon Mobil with its Canadian subsidiary Imperial Oil (holding 25 per cent each).

In the Jean D’Arc Basin, the jack-up rig Rowan Gorilla VI will stay the summer to drill four delineation wells in the White Rose feild.

Meanwhile, Conoco Phillips, with a commitment of $180 million in the Larentian Sub-Basin, has completed seismic work and is looking for a rig to start test drilling in the area.

With promising results from a delineation well drilled on the southern portion of the Hibernia field ("Hibernia South"), project lead Exxon Mobil is exploring options for producing the extension’s additional 200 to 300 million barrels.

But the biggest development news of the year is the project that might not happen - the development of Hebron-Ben Nevis, which is still under active negotiation between the development consortium led by Chevron and the government of Newfoundland and Labrador.

In April 2005 Premier Danny Williams put the consortium on notice that the province would aggressively negotiate for local benefits, musing aloud about a second refinery for the province. Last October he suggested that Newfoundland Hydro, the crown corporation electrical generation and distribution utility, might be interested in taking an equity stake in any new oil projects. With $2 billion in the bank (fruits of the federal-provincial Atlantic Accord renegotiation), he can afford to buy a seat at the project table.

Currently, the Hebron partners are ExxonMobil Canada Properties (with a 37.9 per cent interest), Petro-Canada (23.9 per cent) and Norsk Hydro Canada Oil and Gas Inc. (10.2 per cent). Chevron holds the other 28 per cent.

Williams has made clear his preference to leave the oil in the ground rather than risk Hebron becoming yet another "provincial government give-away". He has offered the consortium the option of fulfilling any two of three provincial demands: richer royalties than outlined in the generic regime, a provincial equity stake in the project or a new oil refinery for the province. Since the February 9th announcement by Newfoundland and Labrador Refining Corporation that they are commissioning a feasibility study for a 300,000 bopd refinery in Placentia Bay (three times the capacity of Come by Chance), the premier seems to have relented on the refinery demand while reiterating his other two.

One way or another talks will be ending soon. On February 3, 2006 Williams revealed that both sides have agreed to wrap up discussions by early April, a deadline set in mid-January by mutual agreement.

Nova Scotia

Although the Nova Scotia offshore sector has almost a billion dollars of exploration commitments spread over 27 licenses, little actual drilling or seismic activity is expected for 2006.
Canadian Superior Oil has expressed interest in seismic and drilling work at its Marauder and Marconi fields, as well as drilling at its Mariner prospect. BEPCo. Canada has set up shop in Halifax and is looking at exploration drilling in the third or fourth quarter of 2006, subject to regulatory approval. BEPCo has additional plans for one to three deepwater wells between 2006 and 2007 and, subject to drilling success, one to three appraisal wells may be drilled between 2008 and 2009.

While no new developments are in the works, existing developments are being improved to extend their productive life. This year, Exxon-Mobil plans to extend the life of the Sable gas project by installing a 7,000-tonne compression deck – a giant pump required to push the natural gas to shore. Built overseas, the compression deck will be installed with local support and the use of the Saipem 7000, the world’s biggest offshore crane.

Despite disappointing results from recent delineation drilling, EnCana remains interested in its Deep Panuke prospect, which is thought to contain close to a trillion cubic feet of natural gas. The company is in dialogue with the government of Nova Scotia, discussing a fiscal regime for the project.

Additionally, Nova Scotia boasts the region’s first foray into unconventional supply: in January 2006, Contact Exploration and Stealth Ventures commenced drilling operations in Springhill, with a horizontal well to test productivity of natural gas from the historical coal beds of Cumberland County.

New Brunswick

New Brunswick has a long history of crude oil and natural gas production. Annual oil production varied from 5,000-30,000 barrels from 1911 to 1988. Natural gas production averaged about 650 million cubic feet annually from 1912 to 1946. From 1953 to 1991 it maintained a fairly steady rate of about 100 million cubic feet per year.

Unlike the other Atlantic provinces, the New Brunswick oil patch is all on dry land. There are two notable projects.

Corridor Inc. of Halifax is drilling its fourteenth well at McCully Field in southern New Brunswick, delineating a field now thought to hold some 1 trillion cubic feet of natural gas. The company believes it has sufficient proven reserves to justify construction of a field gathering system, gas plant and 48-kilometre pipeline to connect with markets in New Brunswick and New England through Maritimes and Northeast Pipeline. If the development receives investor and regulatory approval, work expenditures are anticipated to be C$30 to 40 million.

Approximately 10 miles south of Moncton, New Brunswick, the Stoney Creek project is in close proximity to the largest consumption market in North America, with existing pipeline and refinery infrastructure in place. One of Canada’s oldest producing fields, Stoney Creek has already yielded 800,000 bbl of oil and 28.7 billion cubic feet of gas from 1909 to 1991. To date, less than five per cent of the original oil in place has been recovered.

Contact Exploration of Calgary is preparing to recover as much as it can of the remaining 95 per cent oil in place, as well as some incremental gas reserves to be accessed through horizontal drilling. Financing is in place, the first horizontal well location has been selected, and permitting is in progress. Drilling is expected to commence by the end of February.

Prince Edward Island

PEI holds the distinction of being home to Canada’s first-ever offshore oil well, drilled in 1943. Since then, many holes have been run but none have resulted in a producing field. Although an exploratory natural gas well has not been drilled since 2003, there continues to be interest and activity to secure prospective drilling targets. Four Canadian petroleum companies hold the twelve current exploration licences; to date, eighteen exploratory wells have been drilled.


With oil at US$65 a barrel and climbing, analysts anticipate long-term price buoyancy. Some say that oil prices have nowhere to go but up. There will be volatility, certainly, and periodic fluctuations due to transient political or economic factors. The trend, however, suggests that Atlantic Canada is well-positioned for renewed exploration and development interest: the economics of oil production in challenging regions are becoming increasingly attractive and the region offers some certainty in the context of a global production environment troubled by political instability.

Rising oil prices have created a spike in exploration worldwide, resulting in a global increase in the demand for drill rigs. Competition for rigs is vigorous, and even major oil players are scrambling to line up the equipment they need, at the time they need, for this drilling season.

In the immediate term, each drill rig active offshore means more employment and business opportunities in the local supply and service sector, and in the longer term, the promise of new major finds and perhaps additional developments. As long as the industry continues to take these initial steps, Atlantic Canada’s journey to petroleum prosperity will continue.

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