This is the 3rd of 4 stories on energy projects to come recently published in the Natural Resources Magazine supplement to Atlantic Business Magazine.
On January 17, the Newfoundland and Labrador government issued a letter to the Canada Newfoundland Offshore Petroleum Board (CNLOPB) rejecting an application by partners (HMDC – Hibernia Management and Development Company) in the huge Hibernia offshore project to expand the development to a southern pool, saying not too little information was provided to assess the proposed development plan.
Minister of Natural Resources Kathy Dunderdale said the application didn't properly outline items such as why HMDC isn’t planning to upgrade its existing offshore platform to handle production from Hibernia South. The application also neglected to include an outline of new benefits for the province, such as work for the province's offshore industry.
In a letter to the CNLOPB, Dunderdale stated that until the province received the information on how the oil companies plan to resolve concerns about processing capability at the platform and an explanation about why there was no amendment to the benefits plan for the project, the application could not go forward. Dunderdale invited the companies to provide answers to several questions, so development could proceed.
The application was conditionally approved by the CNLOPB in December 2006, on the understanding that more information would be forthcoming as the project moved forward.
All this was in response to the May 2006 application by HMDC to tap into an estimated 223 million barrels of reserves, potentially much more, in an area called Hibernia South that had not been part of the original Hibernia development plan.
The new development is important to Hibernia's owners because production appears to have peaked. In 2004 output reached more than 200,000 barrels a day. In 2006 it averaged about 180,000 barrels. In December 2006 Petro-Canada, a Hibernia partner company, said the field's average daily production had dropped to 150,000 barrels, due to natural depletion of the field.
The development plan for Hibernia South would have accessed first oil from the extension in 2008, lengthening Hibernia's production life by some ten years (to 2030 from 2020). When Hibernia commenced production in 1997, recoverable oil was estimated at 520 million barrels. That figure is now 1.2 billion barrels, a jump due in part to Hibernia South.
Because this production would come after project pay-out, this oil would be subject to the higher 30% royalty and would represent, by some estimates, some additional $6 billion to the provincial treasury.
That additional $600 million or so per year would come to the province at an opportune time. Unless Hebron comes back on track, government revenues from all the existing projects are projected to go into a steep decline. The provincial government’s dependence on offshore oil revenues was recently demonstrated when the province tipped from surplus to deficit because of the longer than scheduled Terra Nova maintenance shutdown.
This public veto of a CNLOPB decision by the provincial government is unprecedented. Up to now, government and operators negotiated benefits and development plans directly with each other with little, if any, involvement of the CNLOPB.
Only once that process was completed would the operators then apply to the CNLOPB, expecting eventual approval from government in the knowledge that government had already signed off on the contentious issues.
Some observers have noted that if government wanted more information from the companies, the best opportunity would have been during direct negotiations, long before any application to the CNLOPB as was done in the past. The fact that this iteration of the Hibernia South development application was so publicly rejected suggests that the established process has broken down.
Complicating the public environment is the already difficult and acrimonious relationship between government and the Hebron Ben-Nevis consortium. While not identical in membership, the Hebron consortium has several major players in common with the Hibernia consortium - including Chevron Canada, Petro-Canada, Norsk Hydro and most notably ExxonMobil.
The latter was publicly accused by Premier Williams of being the main stumbling block in the Hebron negotiations.
On Hibernia South, the Government of Newfoundland and Labrador has taken a different and more reasoned public tone than on Hebron. Williams himself has mostly stayed away from media microphones on this file, relinquishing the point position to Minister Dunderdale. Government has taken pains to assure both the public and oil companies that there is no connection between this veto of the Hibernia South application and the previous collapse of Hebron negotiations.
Others are not so sure. As early as mid-December, some media were reporting industry sources as saying the Williams government may be linking its approval of Hibernia South to getting Hebron back on the negotiating table.
At last report, HMDC has met with Minister Dunderdale and agreed to re-file its application with the additional requested information sometime in the next few months.