Hebron the start of a ‘bold new era’: Williams
Ambition trumps risk as Newfoundland buys into an unguaranteed offshore discovery
Hebron will probably also pump out more geological water as a byproduct than the other Grand Banks fields. That means the development consortium will have to settle for lower production and reserves recovery rates, on top of the lower prices heavy crude attracts.
And yet, the provincial resources minister isn’t losing sleep over the technical issues. The province’s experts have done their homework. “We looked at it from a wide range of crude oil prices,” Dunderdale assures. “We have a great deal of expertise on oil and gas available to us through our energy corporation and we also went externally for our due diligence.”
She also acknowledges that the industry partners who continue to control majority ownership of Hebron provided no special assurance that the project will go ahead. The ownership group includes Chevron Canada with 26.63 per cent, ExxonMobil Canada Properties with 36.04 per cent, Petro-Canada with 22.73 per cent and StatoilHydro Canada Oil & Gas with 9.7 per cent. “We have a high level of confidence that it is the intent of all the owners to move it forward.”
The province’s experts put in a considerable amount of work testing sensitivities to all possible variables including the size of the deposit, the type of oil and energy market projections. The forecasting exercise covered a wide range of possible crude prices and several potential ROIs, or rates of return on investment, the minister indicated.
The number crunchers concluded it was prudent to take the five per cent piece of Hebron. “Our energy plan states that we look for a 10 per cent equity, but that’s only where it fits our strategic agenda and makes sense for us,” Dunderdale says.
So given the risks, is it a good move?
“Well, why would a government decide to take an equity position in anything?” asks Locke. “It’s a philosophical process. Business is business and as a government you’re entitled to an appropriate amount of rent, of royalties, because you own the resource on behalf of your constituents. You can pay it in the form of royalties or whatever.”
He says there is a risk that there could be a cost overrun. As an equity owner, the province could have to pay the extra expenses and also wind up with no rent under an offshore royalty scheme that is sensitive to project costs.
“All these things depend on what price you pay and what you expect prices to be for oil in the future. If you were calculating this on the basis of $20 a barrel and you’re expecting $120 dollars a barrel, this might be a very good project for you even if there are going to be higher costs than you anticipated,” Locke says.
There are other business advantages to government participation in projects, and not the least of which is the opportunity to mingle with big oil companies as an equal. “They’re our partners now, and we are at the table with them,” says Dunderdale.