When the government of Newfoundland and Labrador paid $110 million for a 4.9 per cent equity stake in the long-stalled Hebron Project this summer, Premier Danny Williams called the deal the start of a “bold new era.”

It is truly both bold and new. The Hebron investment launches the province into the world of direct government participation in oil resources. The step is bold because it is a significant risk up front: The project is still on the drawing boards. It is new because – apart from an ownership stake in a recent expansion of the White Rose field, which was done in the less risky producing phase – this is the first time the province has participated in a new offshore oil venture.

“We now own 4.9 per cent of Hebron,” says Kathy Dunderdale, the province’s minister of natural resources. “We will also pay of course for our 4.9 per cent of development costs as they are incurred, the same as any other partner.”

Through its Crown Oil and Gas Corporation of Newfoundland and Labrador, the provincial government is buying the equity interest at a time when the project is still in what is effectively an early stage of feasibility study.

But the timing is right and squarely on track with the province’s wider industrial strategy, suggests Wade Locke, an economics professor at Memorial University in St. John’s. “That was exactly their stated position, that they would exercise the option to take an equity part in projects that required a development plan,” he says.

The development plan, a requirement for large projects, is part of a co-operative oil policy crafted in the 1980s by the federal and provincial governments and administered by their joint Canada-Newfoundland Offshore Petroleum Board. While the system is a regulatory approval scheme that does not commit either government to investments, the process provides time and opens a door for the province to act.

“It’s in their strategic interest and it’s true for all future projects. So that’s the trend – they’ve made it clear that in those projects they want to go ahead, they can take up to a 10 per cent working interest. It was part of the energy plan they put forward last year,” says Locke.

Did they have to start with such a gamble? The Hebron project is potentially more risky than the province’s three offshore fields now producing: Hibernia, Terra Nova and White Rose. Discovered in 1981, Hebron was deemed non-commercial at the time. Three appraisal wells were drilled later, in 1999-2000, but work towards a production project was again discontinued.

Hebron is a different animal than the other fields on the Grand Banks of Newfoundland and will most likely encounter higher costs. The oil is heavy, at 20 degrees gravity on the international API yardstick. The number is a more attractive 30 degrees or more for the other Grand Banks reserves, on a quality scale where higher numbers spell lighter production and better prices.

The low grade creates a requirement for more wells, which are expected to be pricey horizontal bores running across the geological formation and an artificial lift system.

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