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Canada: New-found impetus for Newfoundland

TWO YEARS after parting company in a war of words, the Newfoundland government and an ExxonMobil-led consortium have decided that proceeding with the Hebron offshore heavy-oil project is more important than their differences. They reached a landmark agreement in August to develop the 0.7bn barrel field at a cost estimated in 2006 at C$5bn-7bn ($4.7bn-6.6bn). First oil is expected in about 2017, peaking at 150,000 barrels a day (b/d) within two years. It will be Newfoundland's fourth offshore project after Hibernia (180,000 b/d), Terra Nova (130,000 b/d) and White Rose (120,000 b/d).

The significance of the Hebron pact is that the Newfoundland government is paying C$110m in cash and covering its share of construction costs to obtain a 4.9% equity stake. Newfoundland premier Danny Williams says the province will now insist on the right to acquire at least 5% of all future offshore developments – a stake it has already negotiated for the next phase of White Rose.

The agreement also imposes an additional super royalty of 6.5%, once capital costs are recovered and oil prices are above $50 a barrel, raising the top royalty rate to 36.5%. Based on $87/b oil, Newfoundland expects to collect C$20bn over a 20-year project life, with an additional C$8bn going to the federal government.

The deal also triggered a change in the Hebron consortium, with ExxonMobil taking over as operator from Chevron Canada. ExxonMobil owns 36.04%, Chevron 26.63%, Petro-Canada 22.73%, StatoilHydro Canada 9.7% and Newfoundland province 4.9%.

Newfoundland's demand for an equity position and higher royalties were significant factors in the collapse of fiscal negotiations in 2006, when Williams singled out ExxonMobil as a "rogue" partner in Hebron and threatened legislation to force the company out of his province.

Liam Mallon, president of ExxonMobil's Canadian unit, sidestepped that provocation, urging the Williams government to develop a "stable, predictable" investment climate and "foster co-operation between resource owners (the government) and investors". And he said: "We are at the balance point in Atlantic Canada, with the potential to grow the industry or go into decline."

Echoing that view, Paul Barnes, Atlantic Canada manager for the Canadian Association of Petroleum Producers, says the Hebron impasse had "more or less stalled other Newfoundland developments". However, now that the "rules of the game are much clearer ... the government will pay its own way and we know what the royalty rules are."

Wade Locke, an economist at Newfoundland's Memorial University, says the Hebron pact is "extremely important because it reconfirms that there is a future for the industry for the next 30 or 40 years."

Next on the agenda is a revival of projects that have been on hold for the past two years and a return to exploration programmes that could turn Newfoundland into a significant producing region. There are hopes an agreement can be reached this year for Hibernia South, a satellite in the ExxonMobil-operated Hibernia project, to add 50,000 b/d of production from an estimated 223m barrels of recoverable oil.

Also poised to move ahead is the expansion of the Husky Energy-led White Rose project, starting with the 24m barrel South White Rose field, followed by 120m barrels at West White Rose and 70m barrels at North Amethyst. Husky, StatoilHydro and Petro-Canada have a contract with Transocean for the drillship Henry Goodrich to complete delineation and exploration wells. Husky expects to have the drillship's services for 17 months to bring its three satellite fields on stream, starting in early 2010 and extending White Rose's operating life by 12-15 years.

Husky has also secured Transocean's semi-submersible GSF Grand Banks under a three-year contract valued at C$380m, with an option to add two more one-year terms to open up new fields. In addition Husky, with a 35% interest, will partner StatoilHydro to drill the Mizzen prospect in the Flemish Pass basin, which is estimated to hold 1.7bn boe of oil and gas.

At the same time, ExxonMobil has contracted a rig to drill a second exploration well in the 8,205 square mile deep-water Orphan basin. The first wildcat was drilled last year to a depth of 24,300 feet in 7,900 feet of water. The well cost about C$200m and remains a tight hole. Indicating its desire to spread the risk, Shell is looking for a partner willing to farm into its 20% Orphan stake. Meanwhile, ConocoPhillips is in the early stages of planning an exploration programme in the gas-prone Laurentian basin.

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