Friday, June 22, 2007

Simpson on oil

Jeffrey Simpson, a mainland Globe and Mail columnist some local nationalists love to hate, has been in the province this week. Not only did he speak to the NOIA conference, he's been publishing columns centered on NL provincial issues.

This is one from today.

(Graphics from Wade Locke's presentation to the Harris Institute.)


The Rock's very own cliffhanger: offshore oil
JEFFREY SIMPSON, June 22, 2007

ST. JOHN'S -- Down the road, past the rhetorical fog that envelops relations between Newfoundland and the federal government, lies the cliff.

The cliff is known to those who follow public issues closely. It scares them, because the fall-off is sharp, and the landing will be hard. The cliff ought to be the consuming public policy issue in Newfoundland. It is not, alas.

Right now, three offshore oil projects (Hibernia, White Rose and Terra Nova) are operating, pouring money into government coffers. Offshore royalties jumped more than $600-million to almost $1-billion for Newfoundland this year. (Ottawa is doing splendidly, too.)

Production and revenues from these three will continue at high levels for another three to five years. Then comes the cliff: a sharp decline in both production and revenues.

Hibernia South might extend production near Hibernia, but it's only perhaps a third the size of Hibernia. White Rose, smallest of the three, will tease out some additional oil. But that's it for the existing three.

There is a fourth project, Hebron, smaller than Hibernia, larger than the other two, located in deep water, with high costs. Hebron was set to move along until, in April last year, the consortium walked away following fruitless negotiations with Premier Danny Williams's government over new demands for equity and royalties. Mr. Williams said this week "discussions" have resumed that he hoped would lead to negotiations.

Most of the Hebron team packed up. Even if a new deal were negotiated, it would take at least a year to reassemble a team. Seven to 10 years later, maybe, oil might flow.

In the meantime, Newfoundland would have arrived at the cliff, the years when production and offshore revenues plunged. A fast restart for Hebron would push back that day of reckoning, but only for five to seven years, because nothing else is in the offshore pipeline.

No commercially recoverable oil has been discovered off Newfoundland for two decades. What's being pumped now was found from 1979 to 1984. A big and very expensive ($225-million or so) drilling project came up empty earlier this year in the Orphan Basin, 325 kilometres offshore. Expensive misses like that one do not encourage fast repeats.

When the going was better, and oil was being discovered in the late 1970s and early 80s, six to 17 drilling projects occurred each year. Since 1988, the it's fallen to zero to three. The competition for drilling rigs worldwide is ferocious. The cost per day has skyrocketed.

Newfoundland's provable offshore deposits are hugely important to the province, but small in the global scheme of things. The world uses about 85 million barrels of oil per day. Newfoundland's total reserves, as known today, would satisfy 20 to 25 days supply; Hebron only perhaps seven days.

The cost of offshore discovery and extraction in Newfoundland is high, which might explain why nothing is in the pipeline after Hebron, discovered in 1980. Natural gas might help, but the province still doesn't have a generic regime for gas. As for the "energy plan" that was promised about three years ago, Newfoundlanders are still waiting.

The cliff is ominous, whether the province confronts it in four, seven or 10 years, because offshore oil is the province's best hope for fiscal stability. With a declining population, personal income tax and sales tax revenues will not grow.

Even if Newfoundland gets its way with Ottawa over equalization and the Atlantic Accord - a highly unlikely possibility given the friction between the two governments - the additional money would be smaller than oil royalties.

Newfoundland's budget last year was $5.3-billion. Royalties and taxes from the offshore brought in about $1-billion. That money allowed the provincial government to cut personal income taxes, raise spending and pay down debt.

It was a wonderful budget in an election year. There could be more like it. But not as many as Newfoundland needs, because the offshore is the only major source of new revenue on the horizon, and it's going to start falling.

Mining is doing well, and the province will get money from those projects. As for developing the Lower Churchill Falls hydro potential, that's at least a decade away. In the meantime, there's the cliff.

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