|
Hunt for Labrador natural gas revived Newfoundland royalty regime, technology advances attract C$186 million in exploration bids; gas discoveries to date total 4.2 Tcf Gary Park For Petroleum News
Just as it happened in Western Canada, the search for oil occurred long before anyone began looking for natural gas on Canada’s East Coast. But the potential resource of 61 trillion cubic feet offshore of Newfoundland has always been a dream of governments and industry.
Other than the Sable project offshore of Nova Scotia and the nearby Deep Panuke field, part of the estimated 18 Tcf on the Scotian Shelf, the odds have been against turning Atlantic Canada into a major gas-producing region.
The stormy, icy seas of the North Atlantic, the technological challenge of getting gas to shore and the absence of a royalty regime have always blocked the path to progress of Newfoundland.
As well, the province’s grand gas prize has been overshadowed by its hydroelectric prospects.
But that hasn’t stopped proponents from quietly evaluating ways to commercialize the resources.
They’ve talked about building a concrete-encased pipeline to withstand icebergs that carve huge trenches into the seabed, deploying tankers to ship compressed natural gas, using gas transport modules on barges, and developing compressed gas coselles (coiled pipe in a carousel-shaped container that could store 330 million cubic feet in one ship).
It’s all been in the name of tapping the vast quantities of natural gas stranded offshore of Newfoundland and opening up markets in the northeastern United States.
Suddenly, long after exploration efforts from 1971 to 1983 yielded five significant gas discoveries totaling 4.2 Tcf on the Labrador Shelf, there is a fresh awakening of interest.
Interest robust in exploration rights Chevron Canada, Husky Energy, Suncor Energy and two small Newfoundland firms (Vulcan Minerals and Investcan Energy) have made successful bids of C$186.4 million for rights to explore four contiguous blocks in an area 30 miles off the Labrador coast, the Canada-Newfoundland and Labrador Offshore Petroleum Board reported September 11.
Husky led the way investing C$10.2 million for 100 percent of one block covering 585,580 acres and paying 75 percent of a C$120.2 million bid for 577,502 acres, with Suncor taking the remaining 25 percent.
Chevron invested C$46.5 million for outright control of a third parcel, while Vulcan and Investcan committed C$9.6 million for the final block.
The dollar figures represent what each company, partnership or joint venture commits to spend during the first six years of a nine-year exploration license.
Husky chief executive officer John Lau said it has been a priority for his company, which already holds major stakes in the Terra Nova and White Rose oil projects, to expand its presence in Newfoundland and Labrador.
To date, Labrador has recorded 26 exploration wells and two delineation holes, which companies drilled at a time when they were looking for oil.
Four years ago, the Hong Kong-controlled company got responses from more than 40 groups interested in helping it develop 2.3 trillion cubic feet of gas associated with the White Rose oil field, placing itself in the forefront of efforts to commercialize the gas resource by tackling the gargantuan obstacles posed by the region. These include 500 icebergs that cut a path across the Grand Banks each year and scour the seafloor, and the costs of exploratory wells, which are now commonly around C$70 million.
In addition, there has been a joint study by various companies looking for ways to move the region ahead.
But, given the time needed to evaluate development and transportation options, Husky’s Lau has doubted that commercial production will take place before 2016.
Over decades, various Newfoundland governments have prodded the industry to find ways to develop the province’s gas resource, with some leaders even hinting that a failure to move ahead could lead to forfeiture of exploration rights.
Breakthroughs for gas The most positive recent development was the release a year ago of a comprehensive Newfoundland energy plan that included the first gas royalty regime covering basic and net royalties.
The basic royalty provides a revenue stream to the government at all stages of a project. It is linked to realized prices, rather than volumes or project economics that apply under existing oil royalty terms, meaning the province’s percentage share of gross revenue from each project would largely be driven by price.
That approach ensures greater transparency and that the interests of government and industry are “well-aligned,” according to the energy plan.
The net royalty is based on project profitability and reflects the revenue and costs associated with a particular project. Where profitability of a project is higher, the province will share in that profitability; where it is less or declining, the net royalty will be lower and the province’s take will decline.
A formula for both royalty rates will enable a quick response to falling or rising prices, “sending a positive message to investors and demonstrating that the province is prepared to share in price risk.”
“It is a challenge to develop a uniform regime to meet the needs of all parties as we have diverse regions like the active Jeanne d’Arc Basin, deepwater regions like the Orphan and Laurentian basins and remote regions like the Labrador Shelf,” the government said.
“We have designed an offshore natural gas royalty that recognizes the cost and shares the risk associated with various gas developments.”
That was an important breakthrough for the gas sector. The second breakthrough occurred last month with a development agreement between the Newfoundland government and the ExxonMobil-operated Hebron oil project, ending two years of tension between industry and government.
Paul Barnes, Atlantic manager for the Canadian Association of Petroleum Producers, said the Hebron pact allows the industry to understand exactly what equity positions the government wants in new projects and that it is willing to pay its full share of those stakes.
He said technological improvements since drillers pulled out of Labrador in 1983 open the way to more cost-efficient operations in the icy waters.
There are also fresh alternatives, such as large liquefied natural gas technology, or LLNG, for shipping the gas to market.
Early days yet for industry As a result, the industry has returned to Labrador to conduct seismic that, along with the initial discoveries, points to considerable potential, he said.
Companies with major interests in one or more of Labrador’s significant discovery licenses include Chevron, Husky, Petro-Canada and ConocoPhillips Canada.
For now, the rights-holders are sidestepping any questions on their exploration plans or the likelihood of commercial gas production.
Husky spokesman Graham White told Petroleum News his company is only in the early stages of planning an assessment of the resources it may hold.
But he said it is motivated by its experience operating in “rough conditions” at White Rose and Terra Nova.
Chevron spokesman Tim Murphy agreed that developing an exploration plan, led by seismic work, will “take a little period of time.”
While there is no questioning the technical challenges, Chevron, already a partner in the Hebron and Hibernia projects, believes it has the “wherewithal” from its global activities to tackle such a frontier opportunity, he said.
Suncor said it has an eye on developing long-term gas prospects as a hedge against the gas it needs to fuel its oil sands operations in Alberta.
| 