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June 2007

Vol. 12, No. 22 Week of June 03, 2007

Newfoundland: Trouble brews in stormy waters

Premier tells industry act now or face higher price later; hints government demand for equity stake to exceed 4.9% sought for Hebron

Gary Park

For Petroleum News

There’s one thing you can count on with Newfoundland Premier Danny Williams.

He doesn’t like still waters.

In his latest attempt to stir the already storm-tossed oceans off his rocky shores, Williams has been putting out word that “conversations” have resumed with partners in the stalled Hebron-Ben Nevis project.

At the same time, he has issued a warning that Newfoundland will demand a substantial equity stake in new offshore projects when it unveils an updated energy policy later this year — far higher than the 4.9 percent that was key contributor to the collapse of negotiations last year with the Hebron partners, who scattered their project leaders around the globe in a strong indication that Hebron had dropped off their priority list.

The Newfoundland government plans to release its new policy before an Oct. 9 provincial election Williams is the prohibitive favorite to win, partly because he has gone to the mat with Big Oil.

In the buildup to the election campaign, he is dropping veiled hints that the industry would be well-advised to accept his current terms or face tougher demands.

If companies “decide they’re going to wait one or two or three or four years, then they will move into an equity regime that we will establish in the new energy plan,” he said earlier in May.

Williams bluntly told the Hebron stakeholders that the bar will be raised from 4.9 percent — a level he said was placed on the table in order to reach a last-minute agreement — but offered no further clues on how high, other than saying the government originally sought 8.5 percent of Hebron.

No formal negotiations under way

What might be taking place out of the public spotlight is a mystery.

Williams told the Financial Post that although no formal negotiations are under way with the Hebron partners “I can tell you categorically that there has not been a complete shutdown of conversations to advance Hebron, so I am still very optimistic that Hebron is going to happen.”

The plans, at the time talks collapsed, involved an C$11 billion development by operator Chevron 28 percent, ExxonMobil 37.9 percent, Petro-Canada 23.9 percent and Norsk Hydro 10.2 percent to develop a field holding estimated proved plus probable reserves of 731 million barrels.

Without providing specifics, he said Newfoundland’s discussions are being led by Ed Martin, chief executive officer of government-owned Newfoundland and Labrador Hydro, which is designated to hold provincial interests in future projects.

The Hebron owners are conceding nothing.

Asked by Petroleum News if any negotiations, formal or otherwise, were taking place, Chevron Canada spokesman Dave Pommer gave an emphatic: “No.” And he added “there is nothing on the horizon right now.”

Williams: positive dealings with Husky Energy

Applying leverage to the multinationals he views as not working in the best interests of Newfoundland, Williams noted that his government has very positive dealings with Husky Energy, which is enthusiastic about prospects for offshore Newfoundland.

It currently produces a net 90,000 barrels per day from its 72.5 percent stake in White Rose for operating costs of a mere C$2.72 per barrel and is eager to keep growing in the region.

The revised energy plan will also include a royalty regime to exploit Newfoundland’s untapped natural gas resources.

A draft of that proposal has already gone to Husky and ConocoPhillips for reaction – another Williams’ tactic to show he is willing to play ball with the industry.

What pleases Williams is the readiness of Husky Chief Executive Officer John Lau to cooperate, including having the government as an equity partner so long as there is no impact on the bottom line.

Sounding like the voice of reason, the premier insists that his government is not looking for a handout. Whatever it gains by way of an equity position it will pay for.

For now, the pace of progress in efforts to open up new basins has been slowed.

Drilling problems delay second well

Drilling problems with the Great Barasway F-66 deepwater well in the Orphan basin mean that the second well scheduled for 2007 has been delayed to 2008 or 2009, depending on an evaluation of F-66 data, rig availability, regulatory and owner approval.

The F-66 well, which outsiders are betting will cost far more than the original estimate of C$140 million, was plugged and abandoned in late April — in keeping with regulatory conditions — and the Eirik Raude semisubmersible rig has left the basin.

It is now back in the Marystown shipyard for inspections and recertifications before heading for the Gulf of Mexico to drill wells for ExxonMobil, said Pommer, speaking for the F-66 operator.

Following time lost for mechanical repairs, the Eirik Raude completed its assignment in April, but the well remains a “tight hole,” allowing the partners to keep well information confidential for two years.

Meanwhile, ConocoPhillips has postponed the first of seven exploration wells in the Laurentian basin to 2009 from an initial 2007 because it is unable to obtain a deepwater rig and needs more time to evaluate seismic surveys.

In addition, it wants a gas royalty regime before it drills, although that is not regarded as a stumbling block at this time.

The gas-prone basin, estimated to hold up to 9 trillion cubic feet plus 700 million barrels of oil, is one of the keys to Newfoundland’s hopes of becoming a gas-producing region.

ConocoPhillips has concentrated on two exploration licenses — one in 3,600 feet of water and the other in almost 7,200 feet of water — limiting the choice of a rig to the Eirik Raude or a drillship which can operate in water depths of up to 10,000 feet.

ConocoPhillips, with partners Murphy Oil and BHP Billiton, holds seven of eight exploration licenses in the basin. Imperial Oil has the eighth.





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