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.