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Fiscal climate in eastern Canada calm Area economy small, driven by large offshore projects; Repsol newest player; ConocoPhillips hunting rig, may face political issues Wes Reid For Petroleum News
Eastern Canada is a region normally associated with high winds and high unemployment. Ironically, however, the fiscal climate there remains calm during this recession. In some parts of the region, real estate — often the canary of economic performance — is flying high. Bob Cadigan is president and CEO of the Newfoundland and Labrador Oil and Gas Industries Association. His organization represents nearly 500 companies servicing and supplying Eastern Canada’s offshore petroleum industry.
“We’re not seeing any of the impacts in the St. John’s area that people elsewhere in Canada are seeing,” Cadigan said via telephone from his office in downtown St. John’s. Newfoundland and Labrador’s capital, it sits at the eastern end of the province facing Ireland. “Housing prices over the last several years have increased significantly — I think in the range of 30 percent — so supply is relatively short; houses are selling fairly quickly.”
Region should have been rocked The world financial crisis should have rocked the Rock (as Newfoundland and Labrador is known in Canada) and Nova Scotia. Their hydrocarbon sectors absorbed the shock and made times in the Maritimes and Newfoundland and Labrador easier than usual.
“It’s a small economy,” Cadigan explained. “By virtue of the fact there are large offshore projects we’re dealing with, we haven’t been seeing the kinds of impacts that you’ve been seeing in Alberta with the more marginal fields.”
Lagging oil demand and the subsequent slump in its value, stretching between last fall and last spring, did create some anxiety among East Coast petroleum players. But crude’s plummeting prices have resurged, shoring up the feasibility of searching offshore for commercially viable hydrocarbon deposits in Newfoundland and Labrador’s Laurentian subbasin, Orphan basin, Jeanne d’Arc basin, Flemish Pass and Labrador Shelf as well as Nova Scotia’s Scotian Shelf.
“In the last two years, the province has attracted more than $300 million in work commitments in the offshore through land sales,” said Newfoundland and Labrador Natural Resources Minister Kathy Dunderdale. “The 2008 land sale attracted new and existing players to the offshore, demonstrating that industry continues to see the province’s basins as prospective with a total of $132 million in work commitments this year alone.”
Repsol new kid on block The new hydrocarbon kid on the Rock’s block that Dunderdale refers to is Spain-based Repsol. Operating worldwide, upstream and down, offshore and on, the petroleum firm partnered with Petro-Canada and Husky Energy to purchase three land blocks, two of them in the Central Ridge-Flemish Pass area, the other in the Jeanne d’Arc basin.
At the Central Ridge-Flemish Pass, Repsol controls 20 percent of one parcel. Petro-Canada and Husky each own 40 percent. The property comprises 138,200 hectares. It cost them $18.6 million. Husky and Repsol paid $1.19 million for 134,227 hectares constituting the other property in the Central Ridge-Flemish Pass.
The Jeanne d’Arc parcel, at 121,348 hectares, went to Husky (67 percent) and Repsol (33 percent) for nearly $9.5 million.
Paul Barnes manages the Atlantic Canada branch of the Canadian Association of Petroleum Producers. He believes Repsol’s purchases illustrate increasing global interest and possible further investment in Eastern Canada’s oil patch.
“The importance of having Repsol actively looking for offshore oil here will help bring international recognition to the region,” he said. “And if they meet success it will certainly help promote Atlantic Canada and bring more investment here.”
Repsol recently disclosed that, with the help of IBM, it has devised a unique seismic imaging system. The company claims the technology can reduce exploration costs by almost 50 percent by spotting more quickly and accurately hydrocarbon reservoirs lying within seafloors. Analysts call the technology Project Kaleidoscope. Repsol may use it first on its Newfoundland and Labrador properties.
Dunderdale’s department says 6 billion barrels of crude and 60 trillion cubic feet of natural gas “wait to be discovered” on Newfoundland and Labrador’s Grand Banks. She believes people can bank on Repsol playing a bigger role in her jurisdiction’s offshore exploration play.
“As a province and a government we are continually looking for opportunities to further advance our energy sector and, I think, our job is made easier by the fact that oil companies continue to have an interest in our highly prospective regions,” Dunderdale said.
Laurentian subbasin The Laurentian subbasin is one such region. Potentially containing 700 million barrels of recoverable crude and 10 tcf of natural gas, the 60,000-square-kilometer slab of deepwater seabed sits between southern Newfoundland and northern Nova Scotia. The Canada-Newfoundland and Labrador Offshore Petroleum Board has, since 2004, issued eight exploration licenses for the subbasin. Last June, during its 2009 Call for Bids, the board placed two more land blocks there on the auction block.
ConocoPhillips holds four of the licenses. In January, the company opened an office in St. John’s. For more than a year, it has been attempting to lease a deepwater drill rig that can sink an exploration well into Laurentian subbasin geology lying beneath 2000 meters of ocean.
ConocoPhillips spokesman Rob Evans said the process has been difficult due to a general shortage of rigs, especially those fit for the area’s frigid, storm-prone abyssal depths.
“This is very deep water,” Evans said from his Calgary office. “There’re not that many rigs available that can operate in that sort of environment. We’ve been talking to a lot of folks but we just haven’t been able to sign on the dotted line yet.”
Ian Way, vice president of strategic planning and business development for ConocoPhillips Canada, noted the firm may sublet a semisubmersible from another oil company.
“We need one that’s capable of drilling in deep water and we’re in conversation with someone about a possible sublet, but having to deal with the owner of the rig as well as the company it’s under contract to right now it gets a little complicated,” he said.
The Laurentian subbasin parcel grabbing most attention from ConocoPhillips has to be drilled by mid-2010. If not, the Canada-Newfoundland and Labrador Offshore Petroleum Board — managing and regulating Newfoundland and Labrador’s offshore hydrocarbon play — could revoke the company’s exploration licence for the property.
“The licences have an expiry of 2013, but there are different terms within those licences that require us to get a well down, I think, in about a year from now without reworking the terms within those licences with the C-NLOPB,” Way said. “If you don’t fulfill the terms of the licences then you would have to relinquish the acreage.”
Deepwater expensive A deepwater exploration well is an expensive proposition. Chevron, estimating it would spend $140 million and four months in late 2006 boring a deepwater well dubbed Great Barasway F-66 at the Orphan basin, ended up coughing up more than $200 million during seven months working on the project. Rough weather, pack ice, and mechanical problems were blamed for most of the cost and time overruns. The company planned to spud a second exploration well in the Orphan basin during mid-2009. Unable yet to obtain a rig and realizing that hole might incur greater expense than their first, Chevron delayed the project.
“The cost estimates … that were coming in for the second well were coming in very high, in fact, higher than the cost estimates for the first well,” said Mark MacLeod, Chevron’s Atlantic Canada manager. The company continues searching for a rig, though, and remains confident in Eastern Canada’s offshore oil patch. “We recognize that it’s disappointing in the local community, but … it’s important to say that we are very committed to the region,” MacLeod said.
If Chevron’s experience is any indication, ConocoPhillips may be underestimating its budget for the Laurentian subbasin.
“We’re looking carefully at all of our investments around the world, with less free cash flow to invest in this particular project, but if we’re able to secure a rig we’re committed to try and test the prospect,” Way said.
Political delays possible Even if ConocoPhillips finds a rig it may still face delays this time of a political nature.
Other oil companies hoping to lease land in the Laurentian subbasin may also experience setbacks.
On behalf of its 6,300 residents comprising the population of St. Pierre-et-Miquelon, France last May, petitioned the United Nations for extended rights to waters covering a swath of the Laurentian subbasin. France took a similar action in 1992. It lost to international arbitration. Given the right to appeal until May13, 2009, it seized the opportunity just before deadline.
Seeing Newfoundland and Labrador prosper and, last summer, gain status for the first time as a Canadian province primarily because of its robust petroleum sector, the people of St. Pierre-et-Miquelon want a piece of that black gold pie. But they and their Gallic cousins from across the Atlantic will be forced to slice it with a sword, according to a Maclean’s Magazine article published in March.
“Canada will take all necessary measures to defend and protect its rights with respect to its continental shelf,” Canadian Foreign Affairs Minister Lawrence Cannon was quoted in the story. Licensing could become tricky if the UN grants France greater territory off Newfoundland’s south coast than it was originally given. Derisively named the Baguette (loaf of bread) by St. Pierre-et-Miquelon locals, it encompasses their two islands — sitting about 20 kilometers off the province — and extends 350 kilometers southward at a width of 2.5 kilometers into the North Atlantic.
That demarcation takes in an insignificant amount of the area potentially containing the hydrocarbons. Whatever the outcome, Way doesn’t believe politics will affect Conoco-Phillips’ drilling plans. “There doesn’t appear to be an overlap with the licensing, so we don’t believe we’re going to be directly affected,” he said.
StatoilHydro moving ahead StatoilHydro won’t have to worry about political squabbling or finding a rig for the well it expects to spud this summer. Foresight and cooperation put that firm, along with Husky Energy and Petro-Canada, in an envious position. Last year, the three pulled off a cost-sharing agreement to secure the semisubmersible oil rig Henry Goodrich. As part of that deal StatoilHydro in December drilled on its Mizzen land parcel nearly 500 kilometers east-northeast of St. John’s. The property is situated in deep water at the Flemish Pass.
The spud was so encouraging that StatoilHydro and Husky Energy, its 35-percent partner in the venture, applied to the C-NLOPB for a significant discovery license. The company announced that “hydrocarbons were encountered.”
The president of StatoilHydro Canada, Erik Abrahamsen seems delighted with the find, but cautions it could take two years to ascertain the Mizzen’s true contents. “This is a big day for StatoilHydro,” said Abrahamsen. “For us, it’s a big step forward. We need to analyse the data and then in a year or two we might be in a position to go on with further appraisal drilling to find out more.”
He also pointed out that deepwater pay dirt can take more than a decade to develop. “If the further appraisal drilling proves enough reserves to make this economically viable for development then you are looking at (at) least 10 years — maybe more, 15 years — before you can see any development and production from this possible field.”
Other activity includes Petro-Canada using the Henry Goodrich to drill two development wells at Terra Nova and an exploration well on its Ballicaters (EL-1092) prospect in the Jeanne d’Arc basin. After that, it will return the rig to Husky, which may drill its Primrose (EL-1089) and Wild Rose (EL-1067) prospects in the Jeanne d’Arc basin.
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