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Vol. 11, No. 16 Week of April 16, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Combative leader digs in

Williams tells Exxon to pull out; minister says wake up call for Mackenzie

Gary Park

For Petroleum News

Newfoundland, traditionally Canada’s poorest province since it joined the Confederation in 1949, is feasting off oil royalties and a renegotiated federal-provincial revenue-sharing deal.

It has projected a modest budget surplus of C$6.2 million for 2006-07 — nothing on the scale of Alberta’s multi-billion dollar windfalls — from estimated royalties of C$471.8 million in the upcoming year when production is forecast to rise 17.5 percent to 130.8 million barrels.

Those forecasts are seen as low-ball numbers based on 2005-06, when a forecast deficit of C$492.5 million turned into a C$76.5 million surplus.

All an encouraging trend for a province of just over 500,000 residents which has suffered from decades of watching its young people head west in pursuit of jobs, with thousands ending up in the oil fields of Alberta.

Why upheaval now?

So why would Newfoundland Premier Danny Williams choose now to cause the greatest government-initiated upheaval in Canada’s petroleum industry in 26 years?

In playing a key role in the collapse of talks between his government and a multi-national consortium backing the development of Newfoundland’s 700-million-barrel Hebron field, Williams has revived memories of the Canadian government’s National Energy Program that bestowed special treatment on Canadian-based companies, caused an exodus of those with foreign ties and sent the industry into a tailspin that took a decade to reverse.

But Williams is adamant that ExxonMobil, the 37.9 percent majority owner of Hebron, caused the others partners – operator Chevron Canada 28 percent, Petro-Canada 23.9 percent and Norsk Hydro 10.2 percent – to break off negotiations.

With a deal in sight, he said the partners reopened their case for incentives, including a 15 percent investment tax credit and a fuel tax exemption, that would have cost his government C$400 million-$500 million.

Tentative agreement for 4.9% stake

Meanwhile, a tentative agreement was in place that would have given Newfoundland the right to acquire a 4.9 percent stake in the project, adding C$500 million to the province’s royalty rates over Hebron’s 25-year operating life.

Add to that estimates by the consortium that its offer of an enhanced royalty regime would have generated C$8 billion-$10 billion over the life of the project, three times what White Rose will yield, in addition to the C$11 billion cost of development that would have included construction of a production platform in Newfoundland.

Those numbers push the foregone benefit to the Newfoundland economy well past the C$20 billion mark — a blow by any standards.

But in his characteristically combative fashion, Williams fingered ExxonMobil as the holdout.

His message to the super giant was to “step aside” and let either its partners or the government buy ExxonMobil’s stake.

Failure to act on that suggestion would leave his government with no option but to introduce legislation or take some other action to “ensure the undeveloped discoveries proceed on a timely basis.”

North America’s Hugo Chavez

That was widely interpreted as a threat to expropriate and has seen Williams tagged as North America’s Hugo Chavez.

Williams, jokingly saying he would rather be compared to Hugo Boss, said it was an unfair comparison, given that the Venezuelan president wants 60 percent ownership of his country’s vast oil holdings, while Newfoundland wants less than 10 percent of that control.

With the Hebron partners showing no signs of bluffing on their decision to dismantle the operation, business and industry leaders are troubled by the turn of events.

Paul Barnes, Atlantic Canada manager for the Canadian Association of Petroleum Producers, told reporters that operators are nervous about Newfoundland’s political climate. If Hebron does not get back on track quickly, hopes for other emerging basins could evaporate, putting a “huge question mark” over the province’s oil and gas future.

Now that Newfoundland has three successful developments (Hibernia, Terra Nova and White Rose), Hebron was seen as vital to maintain that momentum.

The failure to reach an agreement indicates that the “whole rules of the game are now kind of fuzzy … (creating) a high risk that this may deter future potential investors,” Barnes told the St. John’s Telegram.

Wade Locke, an economist at Newfoundland’s Memorial University, said “there are impacts that will be felt, some quicker than others, if this project doesn’t go forward.”

A spokeswoman for the Newfoundland Ocean Industries Association said her group’s 450 member companies have been eagerly waiting for Hebron since a joint operating agreement was signed a year ago.

Supply and service companies have been investing and ramping up their technological capabilities and their workforces so that they would not miss the opportunity.

She said it is vital for both sides to return to the negotiating table.

Tremors beyond Newfoundland

The tremors have also extended far beyond Newfoundland, delivering what Northwest Territories Industry Minister Brendan Bell told Petroleum News was a wake-up call for those involved in other talks with other multinationals, such as partners in the Mackenzie Gas Project.

He said those companies “can walk away and they have shown they are prepared to do that,” regardless of the C$400 million they have already spent on pre-engineering for the Arctic gas venture.

It would be naďve for anyone to rule out the possibility of the Mackenzie consortium deciding to “pack up” and take their capital elsewhere.

Those companies have “assets all around the world and they develop them at the pace they see fit … in a way that maximizes the benefits to shareholders,” Bell said.

But, for now, Williams is dug in, telling the Hebron partners the onus is on them to “agree to our terms.”

Those conditions involve acceptance of two out of three targets: A refinery or petrochemical plant in the province, which he concedes is not realistic; equity for Newfoundland; and an enhanced super royalty during times of high oil prices.

In the interim, Williams has urged his business community to remain cool and be confident that an oil discovery made 25 years ago will be developed “at some point.”

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