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Newfoundland gas beckons Government-industry discussions could result in royalty incentives; Labrador Sea viewed as stepping stone to Greenland, Arctic Gary Park For Petroleum News
At the same time it is mourning the loss of 17 rig workers and two air crew members in the North Atlantic crash of a helicopter, the Newfoundland government is quietly readying its offshore for the next big leap.
The target is natural gas, with discoveries estimated at 10 trillion cubic feet and prospects rated at 60 tcf.
Commercializing the resource has long been a dream of the government, which has indicated it will soon unveil a royalty regime that could include some strong incentives, including a possible royalty holiday, to end a 26-year lull in drilling the gas-rich Labrador Sea.
Energy Minister Kathy Dunderdale acknowledged earlier in March that getting an offshore gas industry kick-started may require the province to “do something different.”
She said the industry has been given notice that the government is ready to discuss “special status” for a pioneering project by “negotiating even more favorable terms” than those contained in Newfoundland’s revised energy plan which contained a formula for calculating gas royalties.
That formula proposes a basic royalty to ensure a revenue stream for the government at all stages of a project and a net royalty based on project profitability, reflecting the revenue and cost associated with projects.
Where profitability is higher, the government wants to share in those returns; where it is less or declining, the government says its take would also decline.
Goal to step up the pace But Dunderdale indicated the government is anxious to step up the pace of activity to commercialize 4.2 tcf of discovered gas offshore Labrador and about 6 tcf offshore the island of Newfoundland.
She said a number of companies interested in developing the gas have been involved in discussions which will soon be expanded to involve the wider industry.
Dunderdale said the government is open to sharing risks by lowering royalties “when times are tough,” and raising them when “return on investment is high.”
She also noted that the government reserves the right to acquire a 10 percent equity stake in future oil and gas projects.
For some companies, turning the Labrador Sea into a producing basin is also a step closer to developing offshore Greenland and eventually advancing into the Arctic.
Husky Energy, Chevron, EnCana and ExxonMobil, key players in the Newfoundland offshore, also have an interest in linking Newfoundland’s portion of the Labrador Sea to the Greenland side, where they all hold exploration licenses.
Husky acquiring seismic Husky has just completed the acquisition of 4,200 miles of 2-D seismic on two blocks, where it has an 87.5 percent interest and 1,800 miles of 2-D seismic on one other block where it has a 43.75 percent stake.
As well, the company expects to resume work this year on a high-resolution aero-gravity and magnetic survey that was about three-quarters completed when bad weather forced a postponement last fall.
Husky Chief Executive Officer John Lau rates Greenland and Labrador as natural extensions of operations in Newfoundland’s Jeanne d’Arc Basin, and further progress towards the Arctic.
To that end, Husky has built up a land position covering 9,000 square miles in waters between Greenland’s west coast and Canada, and plans to explore Labrador in conjunction with Greenland, he said.
EnCana has 47.5 percent of two exploration licenses, with the United Kingdom’s Cairn Energy holding 40 percent and Greenland’s national oil company Nunaoil holding 12.5 percent.
EnCana spokeswoman Carol Howes told Petroleum News the initial subperiod for the two licenses expired at the end of 2007.
The company previously indicated that seismic data gathered from the two blocks yielded “quite positive” results.
A second exploration subperiod stretches from January 2008 to December 2009 and requires a $6 million work commitment for each license.
Once that work is completed, EnCana and its partners will decide if they want to enter the third phase, which starts in January 2010 and requires the drilling of a well and acquisition of 3-D seismic, Howes said.
Labrador Shelf comeback The gas royalty negotiations taking place in Newfoundland reinforce signs of a comeback in the Labrador Shelf, where Husky, Chevron and Suncor Energy, along with minor participation by Vulcan Minerals and Investcan Energy, made work bids of C$186.4 million last fall to secure rights to four parcels covering 2.3 million acres.
Dunderdale concedes that the province’s entire offshore is a harsh environment, underscored March 12 when a helicopter ferrying workers to the Hibernia and White Rose oil platforms crashed.
She said one of the greatest challenges is securing rigs for deepwater exploration, with operators in the emerging Orphan basin, Flemish Pass and Laurentian subbasin all grappling with that problem.
Despite the rig shortage and the downturn in gas prices, the industry remains positive about the eventual gas prospects, bolstered by technological advances and confidence that a robust market will develop in the northeastern United States.
No drilling since 1983 Michael Enachescu, a frontier exploration advisor and adjunct professor at Newfoundland’s Memorial University, said earlier this year that despite Labrador’s logistical difficulties, the basin posted greater exploration success than the Grand Banks and Orphan basin during the 1970s and early 1980s.
Labrador logged 26 exploration wells and two delineation holes, five of them tapping into gas in water depths of about 330 feet to 1,600 feet at a time when oil was the primary target.
Enachescu said in a report that although there has been no drilling since 1983, geoscience research, seabed investigations, speculative seismic data acquisition and environmental work have continued in the interim.
Every summer starting in 2003, Geophysical Science Inc., as well as reprocessing older data, has acquired and processed non-exclusive marine 2-D seismic lines.
The technological gains include improved understanding of avoiding iceberg scouring with undersea pipelines, which Barnes said has advanced “quite a bit” along with reduced costs.
He also noted that LNG or CNG are potential alternative methods of getting Labrador gas to market.
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