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Wednesday, August 22, 2007

Newfoundland & Labrador Sets Precedent with Hebron Offshore Deal

Yesterday reports surfaced that the government of Newfoundland and Labrador had reached an agreement with Chevron Canada and its partners over development of the lucrative Hebron oil project off its shores. Today Premier Danny Williams has confirmed the report and released further details during a press conference held on Confederation Hill in St. John’s.

Williams told reporters that in addition to the standard royalty agreement in place on previously negotiated offshore projects, such as Hibernia and White Rose, the Hebron deal will also include a new “super” royalty regime that will see royalties increase whenever oil prices exceed $50 per barrel, a common situation in today’s markets.

The agreement will also see Newfoundland and Labrador purchase a 4.9% equity position in the project at a cost of $110 million dollars (Can.) marking the first time the oil industry has agreed to an equity stake for any Canadian province on such a development. This has led some industry analysts to believe the precedent setting deal may alter the way other provinces manage their oil developments in the future.

With the Hebron project estimated to cost $6 billion to develop some expected the 4.9% stake would cost an estimated $300 million. The investment by Newfoundland and Labrador announced today was actually much lower at about a third of the price.

Over the 25 year production life of the project, based on oil price projections and the expected inflation rate, the project could be worth upwards of $16 billion to Newfoundland and Labrador. It is also expected to generate more than $7 billion for federal coffers. Clear proof, Williams said, that Newfoundlanders and Labradorians are indeed strong contributors to the Canadian Economy.

Taking advantage of the opportunity to send a message to Ottawa, Williams went on to say that the project would go a long way toward helping to make Newfoundlanders and Labradorians “Masters of our own house”, a statement clearly reminiscent of the early nationalist movement in Quebec.

According to Williams the memorandum of understanding also includes a local benefits agreement that will see construction of a gravity based structure take place in the province and a higher level of local employment than any previous project has fostered.

The Hebron oil field was discovered more than 2 decades ago however the companies involved showed no interest in developing it until the recent rise in oil prices and political instability in other locations worldwide made it look far more attractive to the partners.

The long wait to see development of the field, estimted to contain over 700 million barrels of oil, is something that has irked the people of the province who continue to suffer under high unemployment and a crushing provincial debt.

Two years ago many saw a light at the end of the tunnel but just 18 months ago negotiations broke off when the companies involved walked away from the table after Williams asked for an equity stake in the project and refused to grant hefty tax concessions to the developers.

At the time many national industry analysts and news commentators slammed the premier over his handling of the file, even comparing him as Venezuelan dictator, Hugo Chavez.

Prime Minister Stephen Harper also refused to back the Premier in his efforts to table “fallow field” legislation that would force oil companies sitting on major finds to develop them rather than warehousing them for decades.

Negotiations resumed early this summer after the premier publicly stated that he intended to introduce a new energy plan that would include an even tougher position on all new developments but with the caveat that any deals agreed upon prior to the release of that plan could still move forward without being subject the new regulations.

This move, in addition to the companies involved facing worsenting development conditions in places like Venezuela, where Hugo Chavez is demanding a controlling equity in all projects, has led the developers to rethink their original stand on the Hebron field and to consider a 4.9% stake much more reasonable than they originally did.

It seems that although some in the national media labelled Williams as another Hugo Chavez big oil does not.

There was no indication today on whether or not the companies involved were granted any tax breaks or other concessions as a part of the agreement. When talks broke down in 1996 the companies insisted on a $500 million dollar tax break before moving forward, a demand the Williams government refused to entertain at the time.

As with any memorandum of understanding, the Hebron agreement indicates that all parties are in agreement with the general terms for a binding contract, however the final details of the agreement still need to be ironed out and will likely take several months to finalize.

With today’s announcement Premier Williams is claiming a victory for the people of Newfoundland and Labrador however the official opposition leader, Gerry Reid, says he is waiting to see all the details before making up his mind on the deal.

23 comments:

touton said...

I just read on VOCM site that:

"Another sticking point originally was demands from the oil industry demand for tax breaks. Williams says companies backed down from those demands."

Hopefully the final deal will reflect all that was said today. If so, Ed Hollett may have to stand behind his words in the Finanical Post today when he said,

"...If by some miracle he (Williams) got everything that he wanted, and the companies got nothing that they wanted, then he is the most brilliant negotiator in the universe"

Patriot said...

Hi Touton,

I woudn't be too quick to expect Eddy to back Williams on this deal. In fact, even though it seems like a good deal to me, I still have reservations myself that I'd like to get more information on.

For example, CNN Money is reporting that:

"...Williams said the enhanced royalty rate was 0.5% less than the government had been asking for as a concession to the industry.

There will also be a "slight postponement" of royalty payouts from the consortium, who have dropped their demands for tax breaks, Williams added, but declined to clarify further."

It's not that I mind a drop from 7% to 6.5% on the super royalties, it's still a good deal, but the "slight postponement in royalty payments" is something that gives me pause for thought.

How long is this postponement and will it actually equate to the $500 million in tax breaks the companies wanted or even exceed them in the overall picture.

These are early days in the game so as good as things look right now, and indeed a deal is good becauase it will help build new momentum, I wouldn't shout from the rooftops yet.

Besides, (just a joke) Any little nuance would preclude Eddy from calling Williams a brilliant negotiator and those points above could turn out to be more than just a nuance.

Edward G. Hollett said...

Check the existing Hibernia agreement and its Tier Three royalties.

What was announced today is not 6.5% on oil over US$%) per barrel. It cuts in only after costs of development have been recovered and after other conditions and triggers have been met.

The $16 billion revenue basically consists of the existing royalty regime (assuming a higher price per barrel than Wade Locke used previously) a billion and a half gross on the equity position (using the Premier's 2006 statement) and about another $500 million besides.

It's pretty simple math.

Then we can look hard at the local benefits.

WJM said...

How long is this postponement and will it actually equate to the $500 million in tax breaks the companies wanted or even exceed them in the overall picture.

A question. A good question.

See, how valuable and important it is to ask questions?

Patriot said...

Welcome back Ed.

Thanks for your points but I have to wonder where you are getting all this information. I've been following public news reports since this story hit last evening and I haven't seen anything like the kind of details you are talking about.

Can you provide your source?

You said, "What was announced today is not 6.5% on oil over US$%) per barrel. (I'm assuming you meant over a specific dollar value)"

Then you go on to say, "It cuts in only after costs of development have been recovered and after other conditions and triggers have been met."

How do you know this. I haven't heard anyone mention teir 3 royalties specifically and where are you getting your info on conditions and specific triggers?

You also mentioned the 1.5 billion (+ another 500 million) on the equity stake. In other words 2 billion and you're right, it is simple math, in fact if the price of oil is at about $65 it actually works out to about 2.2 billion, but who's counting.

My real point here is where are you getting your info on the deal itself that seems to be more detailed than has been in the press?

Patriot said...

For informational purposes, while I have the ability to approve or deny comments, I don't have the ability to edit them, nor do I want it.

The reason I mention this is because I was asked in a recent comment why Ed Hollet had not responded to my query about his sources. I opted not to publish the comment because it also made personal accusations that I will not permit to be posted.

As for the answer to the query, Ed did respond but again, because he made certain comments against the character of the readers on this site it was not posted.

Essentially Ed said he gathered it from various news sources and the internet. Though I haven't personally seen some of the information he mentioned in the public domain it does not mean it isn't out there. Either way, that was his response, which I would have posted if he had presented it a way that did not belittle the readers here.

Patriot said...

Sorry, correction to my previous comment. It should have read, "if he had presented it a way that I DID NOT FEEL belittled the readers here."

Ussr said...

http://www.theglobeandmail.com/servlet/story/RTGAM.20070821.whebron0821/BNStory/National/home - lol!!!I'M laughing my A$@ -OFF!!!Hey Harper How many Fingers do I have Up.:) I cant stop watching it!!!!

Patriot said...

Folks, I've gone to zero tolerance here when it comes to jabbing at each other rather than focusing on the topic.

Since I noted that I had denied a couple of comments I've had response back making comments about "Eddy" and from Ed complaining that I refused his comment.

I've been told that since I let so much back and forth go on before that it's hypocritical for me to block it now.

All I can say is none of those posts made it through and as for being hypocritical, I believe it was some of the same people who complained and said I should not allow anony comments and that this was little more than a snakes nest that should not post those comments who are complaining the strongest now that I am.

I guess you can't please everyone.

The equation is easy. Discuss the topic and leave personally directed comments out of your submission and it will get posted, otherwise it won't.

babe in boyland said...

Patriot: I like the turn of tone that your blog has taken. Serious issues are under discussion, and I had been shocked by how out of control some commentary had gotten. Congratulations. You have made it possible once again to discuss these issues rationally.

touton said...

The following is an article and the comments on it from Sue's blog. Very interesting back and forth on this from Sue and Ed, both have their own take on the situation.

Here it is I hope she's OK with putting it here in a comment.

Sue's Article: A + for the Hebron MOU - stay tuned...

As one Newfoundlander and Labradorian who stood squarely behind the Premier on his position with big oil - I am not disappointed. The benefits announced from the Memorandum of Understanding signed off by both sides are extremely beneficial to the people of our Province.

As I also believe strongly in equity positions on major resource developments - this 4.9% is something I support fully. That is exactly what Norway has done to make Norsk Hydro what it is today.

The equity position is great. 4.9%

The super royalty is great. 6.5%

The stated intent on local engineering - design - and construction work is great.

The Research and Development commitment is average.


$120 million over the life of the project.


The Education commitment is poor.


$1 million pre-sanction to College of North Atlantic and Memorial University of Newfoundland to enhance skills training.


On the choice of platform - Floating Production, Storage and Offloading (FPSO) - or Gravity Based Structure (GBS) - myself and the Premier may disagree but both would have exceptional benefits for the province - if the legal agreement delivers the objectives of the MOU.

Here's the difference for me:

The FPSO can be costed over more that one project and is significantly cheaper. The GBS is one project - one unit and currently is a permanent structure in the water.

This means cost recovery or time to royalties may be increased with the GBS. On the Premier's side of this however is the GBS is more labour intensive especially for building and construction trades. So one might say what we lose on the cost recovery/royalties we make up for through increased employment and perhaps materials supply.

I would and have argued that the FPSO technology is an area where facilities such as those found in Marystown benefit greatly from gaining expertise in building and maintaining them - in a fashion that additional work from FPSO's not involved in our oil patch would be achieved. In other words an industry developed on but not dependent on our resources.

Having said that it is believed that GBS is better for heavy oil projects.
Further the GBS is now being looked at for LNG applications. Perhaps we can develop an industry based on these structures.

Considering the engineering expertise employed by government and the oil consortium - I yield - to that decision.

All in all this is an advanced MOU which satisfies the Province's benefits list for the Hebron development.

Danny Williams was right to hold off until equity - super royalty - and employment/construction/engineering targets were achieved.

This MOU is a superior and an advanced position for a province in deals with oil companies/consortiums.

I do not believe the oil consortium gained anything tremendous in this MOU. I do believe the Province gained substantially in this particular project.

I do believe the additional benefits to some or all of the consortium partners will be found outside this deal in future ventures. We will get into that next week.

Now it's back to the Lower Churchill.
Labels: building and construction trades, chevron, Danny Williams, equity, exxon, FPSO, GBS, Hebron, Norsk Hydro, oil and gas


posted by Sue at 7:06 PM


9 Comments:
calvin said...
I truely think that the only person that is Un-happy with this out-come Sue,is "EDDY" Hollett.Seems to me that "EDDY" has a real "POTTY MOUTH" over at another blog.But ,thats another story.

Anyhow,I must say Sue,given my stance towards canada,I still do wonder what this is going to mean for the province and more especially for Labrador.Now that it seems we may have the money to develop all this clean electric energy,what about the people in the Big-Land and what will they get from this deal.Hebron is only going to last us for a specific amount of time.I would love to see all this money put into development for Labrador.I still believe that Labrador is our future,and our brothers in the Big Land have gone with-out for far to long.

What about all those off-shore wind farms that the Governement was talking about.Renewable assets are what we need for the Future.

August 22, 2007 8:35 PM
Edward G. Hollett said...
You obviously missed two rather important pieces of information:

1. The 6.5% is not what you think it is. Go look at the generic regime and realize the 6.5% comes AFTER simple payout and after other allowances and terms are met. The odds of collecting are low and the money won't cut in until sometime in the 2020s.

2. Chevron studied at least four configurations for production platforms. In every example using an FPSO, the FPSO sank when loaded.

GBS is the only cost-effective means of developing the heavy sour field.

Again, I know you won't let this through your censorship department because it would demonstrate your lack of information.

August 22, 2007 9:03 PM
Sue said...
Ed - you were wrong - Williams did get terms of negotiation you thought impossible.

It was worth the 16 - 17 - 18 months wait.

I do know what the 6.5% means and am familiar with the royalty regime.

Nothing I stated would show otherwise.

The fact(if so) the money would not be seen until the 2020's does not trouble me - in fact it pleases me to know that the next generation will benefit.

That's the difference between you and I - that's where we parted ways - the privatization of Newfoundland and Labrador Hydro for a quick fix on deficit and debt - versus looking into the future for our children.

As for the engineering and the choice of platform - please read my comments again - as I was clear that I side with the expertise in engineering.

The energy and resource policies you articulate are nothing more than a continuation of past giveaways.

Let's see who follows you into that failed abyss.

The reason for limiting your comments are plenty - but primarily - it is because you provide nothing more than an attempt to criticize me for any reason you can dream up. The 300 or so comments and emails from you would be in some circles thought to be net-stalking.

Clyde is no longer the Premier - the failed energy and resource policies of past Liberal and Tory governments are obvious - that's not to mention the successful law suits against the province during Clyde's term - the failed privatization attempt - and his failure to move the province forward.

Your pontification on energy policy and your advice on same - should not be followed if we are to move upward.

By the way why did you wait until Linda took over from Randy to call open-line?

You and your hatred will not prevent me from speaking - do you understand that?

Your petty insults and your incessant attacks on anything and everything I say will not prevent me from speaking - do you understand that?

You and your ilk tried but failed to shut me up during the hydro privatization and all the sordid details of when Ed Roberts went into Cabinet prior to being elected and then went on to run in the district of Naskopi - do you understand that?

Yes Ed's - I will not forget - and the strength gained during that period of time - will allow me to carry on - do you understand that?

Chuck Furey - Doug House - Clyde Wells et al - no I do not forget.

Understand this - the bully you claim Danny is - pales in comparison to the back-door - shadowed bullying you engage in - do you understand that.

I love Newfoundland and Labrador and love our people. My purpose is only to see our people and country (Newfoundland and Labrador) prosper.

Now the censor button is back on - I'm sure you will understand that?

This amount of time wasted on you is already too much - and so I continue on with issues that are much more important to everybody outside the world of ED.

August 22, 2007 9:48 PM
Anonymous said...
Sue - Nobody doubts that you have your province Newfoundland and Labrador and its people, first and foremost on your mind. You have demonstrated that love quite profoundly over the past 15 years ever since you took on the fight against the privatization of hydro.

It is not hard to differentiate who amongst the blogging community or the callers to the Open Line Shows are looking after the welfare of the province and its people. You can tell the ones who are afflicted with the "me syndrome" , they are the ones who always side with Big Oil's point of view or they prefer to see the Lower Churchill Hydroelectricty enrgy exported out of the province, in other words they never want what is best for Newfoundland and Labrador, they want what is best for themselves. They rather act as lobbyists for whoever is vying for our resources. I can only assume these people have interests of their own which are adverse to the province's interests.

August 22, 2007 10:30 PM
WJM said...
I still believe that Labrador is our future,and our brothers in the Big Land have gone with-out for far to long.

If Labrador is "our" future, then who or what is Labrador's future?

August 22, 2007 10:44 PM
calvin said...
Small minds Sue my Dear!!!!!

August 23, 2007 12:23 AM
calvin said...
Here ,Here!!!

August 23, 2007 1:20 AM
Anonymous said...
Well said Sue. Bravo!

It's people like Mr. Hobbitt, whose distaste of anything remotely positive from the Williams government, distorts his views. He writes with such bitterness that you almost feel sorry for the guy.

What else would one expect from a person who thinks that the sun shines out of Clyde Wells arse.

August 23, 2007 7:35 AM
Anonymous said...
Well said Sue. Bravo!

It people like Mr. Hobbitt who think anything positive the present adminstration does is wrong. They go out of their way to make the government look bad but, by doing so, make themselves look desperate and pathetic.

What would you expect from someone who thinks the sun shines out of Clyde Wells arse?

His ramblings and attempts to justify his remarks almost make one feel sorry for the boy.

August 23, 2007 7:55 AM

Wince said...

Keep doing what you're doing Myles. I welcome the civil responses and don't miss even for a second all the childish nonsense we were subjected to for a while.

And I welcome back Ed and WJM as well.

Wince said...

USSR

You posted a GlobeandMail link but the full link is not displaying in the comments window. Could you please repost and perhaps break it down into smaller chunks.

It appears like it's extending beyond the right edge of the comments window.

Ussr said...

Patriot ,I must say that I am by no means a supporter of Danny Williams .I have always come to the conclusion that Mr Williams has his heart in the right place ,but he has remaind far to passive with Canada and our resources.

But,what surprises me more is the lack of positive feed back that I see coming from your Blog.The people here do not seem to be pouring positive comments about this administration ,and i for one would like to say that Mr Williams has acomplished a great deal here for us as Newfoundlanders and Labradorians.I dont want to take a poke at your readers Patriot ,but shouldnt we be jumping up and down now as Newfoundlanders and Labradorians.What this money alone will allow us to do in our Province is beyond most mind sets.This is a Great day for us as a nation,I just wish someone on a blog somewere could show some happieness.

GOD BLESS NEWFOUNDLAND ,AND LABRADOR.

PS,.....Im still watching It.

Blogerwoman said...

Thanks Patriot! You also have Newfoundland and Labrador's interest at heart! Good Sportsmanship!

touton said...

Before the big press conference the premier placed a call to Steve Harper as a "courtesy" to let him know what was about to happen. A much better approach than the one Harper used when he showed up in the province without anyone knowing.

Harper was "out of hte office" but his people said he would call back.

Nobody seems to know if he called back yet, if they do can they pass along what was said?

To me, the premier doing this was a way to extend an olive branch and get back into discussions with Harper on a way to resolve the deadlock between them.

I guess we know who the bigger man is now, especially if Harper wastes the chance to accept that branch.

Even if he calls back I'm sure he'll have the news reporters handy so it will look like he made the first move.

The only way Harper beats the stature of Danny is in physical height and girth.

touton said...

From Today's Edmonton Journal. It looks like Danny has gone from dictator to hero in the eyes of the oil patch.

Education for Ed in Danny's deal?
The Edmonton Journal
Published: 2:05 am

For months, Newfoundland and Labrador Premier Danny Williams has stared down the country's largest oil companies. Wednesday, "Big Oil" -- as the bombastic Williams likes to call the multinationals -- blinked.

At a St. John's news conference, the premier announced a "memorandum of understanding" outlining a deal that will develop the $5-billion Hebron offshore oil project located 350 kilometres southeast of the provincial capital. In a rare public-private arrangement, the province will invest $110 million in return for a 4.9-per-cent equity stake in the venture. Williams said that will amount to about 35 million barrels of oil out of a possible overall haul of 700 million barrels.

On the royalty side, the province received an improved rate structure that would deliver a new royalty of 6.5 per cent of net revenues when oil prices exceed $50 a barrel.

For Tory Williams, on the verge of a provincial election campaign he is expected to win in a landslide, the deal is proof that "step by step we are becoming masters of our own house."

James Bates, of the consortium project leader Chevron Canada Ltd., said his company was "happy with" the deal and that the memorandum was an "essential first step in moving the project forward."

Not so long ago, Williams' supposed intransigence over a larger stake for his province was widely ridiculed. The consortium broke off talks with the province in April, 2006 and didn't begin again until June of this year. Analysts agree the reason for resumption of negotiations is dead simple. Oil prices are up -- and compared to Venezuela's Hugo Chavez, Danny Williams is an Avalon pussycat.

The Newfoundland breakthrough is a timely development for Albertans as well. Our provincial government's royalty review process is currently full flight, at a time when royalties as a percentage of revenues have been falling, and when many Albertans -- not least of whom is former premier Peter Lougheed -- have suggested rates need to be rethought.

Decidedly different though the situations may be, there are lessons Premier Ed Stelmach might draw from the often Mysterious East.

Fearful of a return to the gloomy, stalled oilpatch days of the early 1980s, successive Alberta governments have been loath to antagonize the boardrooms of Calgary. Undreamt-of royalties have been pouring in for years, and few have dared challenge the mighty, sophisticated petroleum-industry lobby. The threat -- real, implied or imagined -- that tough bargaining by the Alberta government might prompt oil companies to curb its enthusiasm for investment here has been taken very seriously. No less a figure than finance minister and former Tory leadership candidate Lyle Oberg has mused that now might not be best time to increase the burden they bear.

To be fair, there have been times when it was prudent to treat the industry gingerly. And even in today's boom, no one should want our provincial government to even rhetorically regard the titans of ExxonMobil or Petro-Canada as villains out to cheat us of our birthright. Frankly, Alberta simply isn't as desperate as our eastern friends, contending with a ravaged fishery, empty outports and many of its sons and daughters moving to Alberta to make a living.

But with oil prices in the current $70 range, and given the Newfoundland deal, it seems clear that the Stelmach government has more leverage than many have imagined. In the end, the oil companies' bluff was called by Williams, who correctly posited that the Hebron lease was far more valuable than the consortium let on -- too valuable to pass up.

Equity stakes may not be the Albertan way. And Stelmach's public persona is indeed a continent away from the feisty-posturing of Danny Williams. But one doesn't have to tear down Canadian flags or demonize energy sector "fatcats" to cut a fair deal. It's only a matter of knowing what cards you're holding. Wednesday's opportune announcement in St. John's should inspire Stelmach to be a bolder player at Texas Hold-'Em.

Ussr said...

http://www.theglobeandmail.com/servlet/story/RTGAM.20070821.whebron0821/BNStory/National/home



Thats the total link guys ,i really hope that you enjoy watching it.Its day two and i m still watching it,lol!!!!

Ussr said...

Pardon me again Patriot,........guys scroll down half-way thru the page and see vidieo's and your there .There are two there about the Premier and the deal.

Can you believe that some are already shouting for Newfoundland and Labrador to be cut off of Equalization Payments,Gimme a Break!!!

This is what makes me relise excactly what Canada is all about.Money.Bottom line the buck.Anything for it ,and nothing to hold it back.Even your fellow countrymen .Ha, and we want to be apart of this.

How much is Canada getting from this off-shore deal.How much do they get from Labrador in minerals and Hydro.The Bills in the Province amount to 11 Billion.Patriot ,thease Federalists types make me sick to my stomach.Dont post it ,I really dont care.But the truth is the truht is the thruth.And ya wanna know something buddy,they make me sick!!!!We dont need them they need us,and they know it.

" REPUBLIC OF "

babe in boyland said...

OK - I was wrong. This has not really gotten civil or rational.

And Touton - how do you know the Premier called the PM before he made the Hebron announcement? THAT I'd like to know.

touton said...

Babe in Boyland:

I'm not sure what you mean about not being civilized. I only posted an article from the Edmonton Journal and mentioned the phone call.

and I got my information about the phone call from the local news. Fred Hutton of NTV interviewed the premier and they talked about it.

babe in boyland said...

Touton:

I hadn't seen NTV News. Thanks for telliing me. And I wasn't talking about you, I was talking about comments like this: "It's people like Mr. Hobbitt, whose distaste of anything remotely positive from the Williams government, distorts his views. He writes with such bitterness that you almost feel sorry for the guy.

What else would one expect from a person who thinks that the sun shines out of Clyde Wells arse."

That's just purile.

Ussr said...

Babe ,...........I can say that I dont live in our beloved Province ,but I can say that I seem to be the Happiest Sod In this House that Williams Has done this Deal!!!

GOOD FOR US!!!!