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Vol. 11, No. 17 Week of April 23, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Chavez of the North

Newfoundland premier fails to enlist federal support for ‘use or lose it’

Gary Park

For Petroleum News

Craggy and storm-battered, Newfoundland is known as The Rock.

It’s a fitting comparison with the province’s resilient people who have struggled through centuries of economic hardship — a spirit captured by the island’s premier, Danny Williams, who last year fought and won a battle for a greater chunk of revenues from offshore oil assets that are technically owned by the Canadian government.

Emboldened by that victory, Williams stepped up his campaign, laying claim to the federal 8.5 percent stake in the Hibernia project and demanding an equity share in future offshore projects, starting with the Hebron venture.

Now Williams finds himself between The Rock and a hard place, losing friends in the industry and the Canadian government.

He has even earned the title “Canada’s Hugo Chavez” on the editorial pages of The Globe and Mail, Canada’s self-styled national newspaper.

Hebron as a test case

Turning Hebron into a test case as he campaigns for fairness and justice in the development of offshore resources, Williams has talked about a provincial equity stake, higher royalties, limiting government tax incentives and, most recently, “use it or lose it” legislation setting a time limit on the development of offshore discoveries.

His rhetoric soared to new heights when he suggested that unless companies agreed to those demands, leases might be expropriated and entire projects taken over by his government.

The Globe and Mail suggested that such an ultimatum echoed the hard line being taken by Venezuelan President Hugo Chavez in seizing two privately operated oil fields, prompting ExxonMobil to sell its share of a small operation to avoid creating a joint venture with the government.

The newspaper cautioned Williams to tread carefully, reminding him of an earlier misadventure when the Newfoundland government took control of a refinery that ended up as one of Canada’s largest bankruptcies.

For now, Williams is not paying much heed to the voices of reason.

Before entering politics, he turned a C$2,500 loan into a C$250 million cable TV company.

That success gives him unbounded confidence in the rightness of his cause.

But Williams’ bombast and bluster show signs of wearing thin.

Unease about Newfoundland offshore spreading

Since the Hebron negotiations collapsed, amid a bitter attack on 37.9 percent partner ExxonMobil by Williams, unease about the long-term future of Newfoundland’s offshore has spread.

While Williams and Natural Resources Minister Ed Byrne kept spreading a message that their doors were still open and a negotiated deal was still possible, the Chevron-led Hebron consortium wasted no time dismantling a team that has been working on the project, since it was revived 18 months ago.

James Bates, chief negotiator for Hebron Canada, told Petroleum News the two leading managers have been transferred to Australia and most others would be relocated in the next few weeks.

“I want to make sure that everybody is clear that this thing is over,” he said.

Effectively spurning talk that the Hebron partners were bluffing, Bates said that even if fiscal and regulatory agreements could be reached it would take a minimum two years to reassemble the talent needed for such a “technically challenging project.”

Without getting drawn into a verbal tussle with the Newfoundland government, Bates noted that the Hebron consortium’s final offer before talks collapsed included an extra C$1 billion in royalties, raising estimated direct revenues to the province to C$8 billion-$10 billion, plus development costs of C$4 billion-$5 billion.

Williams asks if Exxon ready to sell

Williams was unmoved, sending a letter to ExxonMobil asking if it was ready to sell its 37.9 percent share, telling reporters he would prefer to see the assets dispersed among the other three owners (Chevron 28 percent, Petro-Canada 23.9 percent and Norsk Hydro 10.2 percent).

Otherwise, he said the province was willing to pay a 37.9 percent portion of the C$380 million it believes has so far been spent on Hebron, plus a projected share of future project profits.

He said the consortium had once agreed to a 4.9 percent equity position for Newfoundland, but also sought C$500 million in investment tax credits and would not set a minimum on the engineering work that would be committed to Newfoundland.

Faced with a deadlock, Williams opted to pursue the Hugo Chavez course, threatening fast-track legislation that would allow his province to force the sale of any oil discovery that remained undeveloped for 20 or 25 years (Hebron was found in 1980-81) or risk expropriation.

Harper avoids joint news conference

He tried to enlist federal backing for his tactics in meetings with Canada’s newly elected Prime Minister Stephen Harper on April 12.

Despite enthusiastic praise of Williams’ “determination (in trying to make Newfoundland) a hub of economic and entrepreneurial activity” — although he was careful not to directly link those comments to the offshore dispute — Harper avoided holding a joint news conference with Williams in St. John’s, Newfoundland.

While Williams was left waiting in a nearby coffee shop, Harper told reporters he thought it was “important to respect any property rights and that we (don’t) expose the government of Canada or the taxpayers of Canada to significant liabilities.”

That message echoed the warnings of trade experts who say the North American Free Trade Agreement gives investors in the United States, Canada and Mexico the right to sue any NAFTA partner government for compensation and damages resulting from an expropriation of assets.

Harper appeared to chide Williams by saying “we have learned in the past it’s best to keep a stable investment climate in the oil and gas business and that’s the general approach the government of Canada will take.”

If the underlying message was designed to persuade Williams to cool off, it didn’t work.

The premier said that “as long as I’m in this job, we’ll maintain this position. So there is no question of the oil industry waiting me out.”

He said the United States, Norway, Britain, Australia and Alberta all have variations of “fallow field” legislation, limiting how long companies have to explore for and develop resources.

Alberta limits oil sands leases to 15 years

Alberta set a 15-year limit on oil sands leases and what was “good enough for Alberta is good enough for Newfoundland,” he said.

Byrne told the Newfoundland legislature that for 20 to 25 years companies have “warehoused commercial (offshore) developments” that should now have been generating revenue.

“We support a regime that is friendly, that is competitive, but doesn’t put our resources in the hands of major oil companies forever and a day,” he said, expressing frustration that nothing has happened with the 5 trillion cubic feet of gas discovered in Labrador’s offshore 20 years ago.

In a recent response to Newfoundland’s initial pressure on the industry, the Canadian Association of Petroleum Producers said the province’s economy “continues to flourish” at a growth rate of 5.2 percent largely due to oil and gas activity.

It said the industry requires a “predictable and stable investment climate with regulatory certainty and fiscal stability over the long-term” and that is committed to a “market-oriented policy framework.”

The association said the government’s desire to maximize benefits “must be balanced against the need for a return on investment to maintain the province’s competitiveness in the global marketplace.”

It bluntly urged the government to “encourage and foster a more cooperative and open approach.”

Specifically referring to the stalled exploitation of Newfoundland’s “tremendous gas potential,” CAPP said the introduction of a gas royalty regime and a policy on gas development would “remove the deterrent … that currently exists.”

Paul Barnes, Atlantic Canada manager for CAPP, said short-term drilling commitments will likely proceed, but operators are nervous about the longer-range outlook in a region that is a major exporter of oil to the U.S.

Exploratory well this summer in Orphan Basin

In support of that view, a Chevron-led partnership plans to drill an initial exploratory well this summer because it has contracted with Ocean Rig to use the semi-submersible Eirik Raude to spud a deepwater well in the Orphan Basin.

Having spent C$673 million in 2003 to acquire eight parcels, the consortium has gathered 3-D seismic over the last two summers and is ready to test projections that the basin may have four pools each larger than the 884 million barrels in the Hibernia field.

But the Newfoundland government has created uncertainty in that venture by indicating it wants to participate in the exploratory drilling, without specifying what role it wants.

The real test of industry-wide response to Williams’ hard line will come on Nov. 15 when Newfoundland’s offshore regulator discloses the results of a Call for Bids covering 11 parcels and 4.23 million acres — the third largest auction in Newfoundland history.

In the wake of bleak drilling results and dismal recent land sales, industry is hungry for fresh exploration programs to rebuild a waning momentum.

The bidding will also determine whether Danny Williams has scared off the most important source of government revenue.

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