Pre-Development Projects: Orphan Basin

This is the last of 4 stories on energy projects to come recently published in the Natural Resources Magazine supplement to Atlantic Business Magazine. Latest updates on this story are at the end.

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While a very public spat goes on between big oil and the government of Newfoundland and Labrador over the future of the Hebron ben-Nevis and Hibernia South developments, Chevron and ExxonMobil, along with Imperial Oil Ltd. and Shell Canada Ltd., continue to invest in the region.

Last summer, they started drilling a $140-million well - the most expensive in Canadian history - in another offshore region called the Orphan Basin. The well is close to complete and results are as yet unknown. Two more wells are expected to be drilled this year.

The Orphan Basin is located approximately 325 km from Newfoundland landmark and roughly 150 km north of the Hibernia, Terra Nova and White Rose oil fields on the Grand Banks.

This region made big news in late 2003 when it became clear that the major oil companies were very keenly interested in further exploration off Newfoundland's east coast. ExxonMobil, along with its Canadian subsidiary Imperial Oil, and Chevron committed to spending more than $672 million to explore eight parcels of land all located in the Orphan Basin.

The total amount bid was a record for the province's offshore at more than three times the previous high. The companies have to spend the amount of money they've bid on exploration during the first five years of their nine-year leases.

Prior to 2003, the Orphan Basin was subject to minimal exploration activity. Between 1974 and 1985, only seven wells were drilled in the region. That effort resulted in an extremely low well density so the CNLOPB’s Call for Bids provided an excellent opportunity to further evaluate the potential of this area.

The significance of the Orphan Basin is both long-term and short-term.

In the long-term, more exploration represents the potential of more projects in the future in an area which may hold as much oil as the Grand Banks where the other three projects are located. It’s an industry axiom that while exploration does not necessarily yield oil, you will never find new developments unless you invest in exploring for them.

In the years following the initial Hibernia discovery, companies took advantage of federal incentives to explore offshore. From the Hibernia discovery in 1979 to 1991, $2.8 billion was spent in exploration. However, since then only $643 million went into exploration.

Since 1992, a total of only 18 exploration wells have been drilled. That compares to the intense exploration activity of the early 70's: 1972 (11 wells), 1973(17 wells) and 1974 (9 wells).

To carry out the exploration, the consortium has contracted the massive rig Eirik Raude, which was drilling in the Barents Sea. Another drilling rig, the jack-up Rowan Gorilla VI, returned last summer to drill too.

The entire local industry has been anxiously awaiting the results of these test drills because there have been no significant new finds of oil off Newfoundland's coast in 20 years.

So far, Chevron indicates they are very pleased with 3-D seismic programs conducted over the last two summers. Analysis of the two seasons of seismic data will continue into 2006 to identify geological structures that may contain hydrocarbon deposits, and determine possible locations for future exploration wells.

Despite its attractiveness to the world’s largest oil and gas exploration companies, the Orphan Basin does present some unique challenges of which the most significant challenges are logistical. Unlike existing developments in the Jeanne D’arc basin, which are approximately 300 km from shore, the Orphan Basin is 300 – 500 km from shore. Compared to the Grand Banks is a harsher environment. Compared to the Grand Banks where the water depth runs about 80m, at the Orphan Basin the water depth ranges to 2500m and is much colder; about 2-3 degrees above zero at that depth.

Additional challenges include the range of helicopters used to transfer workers to the rig, and the additional time required for supply boats. However, these are all challenges that can be overcome by an increasingly experienced supply and service community well-schooled in the challenges associated with the current projects.

In the short-term, this exploration program represents activity for the local supply and service sector. As the most expensive well ever drilled on the east Coast of Canada, every day of drilling represents an expenditure of a rumoured C$500,000 per day just for the rig. In addition, there are the local expenditures for three supply vessels, helicopters, catering, logging, mud, cement, testing etc.

The Orphan Basin shows how if your territory contains hydrocarbons, oil companies will beat a path to your door. The fact that they have already made considerable regional investments in production-related facilities and their previous experience in harsh environment exploration and production provides the incentive to keep looking for more oil.

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On March 28th, the Financial Post published a story on the upcoming departure of the Eirik Raude drilling rig noting that:

"The move is yet another setback for Danny Williams, Premier of Newfoundland and Labrador, who wants to increase provincial revenue from oil development and take equity stakes in projects."

The Telegram also noted the departure here.

Pre-Development Projects: Hibernia South

This is the 3rd of 4 stories on energy projects to come recently published in the Natural Resources Magazine supplement to Atlantic Business Magazine.

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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.