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Chevron, ExxonMobil deliver heavy setback to Newfoundland offshore Chevron ‘shelves’ plans to develop 500-million-barrel Hebron-Ben Nevis field; ExxonMobil out to sell or trade interests in nine exploration licenses Gary Park PNA Canadian Correspondent
The heavy artillery is staging a full-scale retreat, delivering a devastating and possibly destructive blow to Canada’s fledgling East Coast oil frontier.
The Canadian subsidiaries of global giants ChevronTexaco Corp. and Exxon Mobil Corp. — both significant players in the Canadian Arctic and Alaska — have left the hopes of a major oil production region in tatters after effectively abandoning Newfoundland’s offshore.
A consortium led by Chevron Canada Resources “shelved” plans for a C$3 billion (US$1.9 billion) development of the Hebron-Ben Nevis field, which was targeted for start-up in 2005 to recover up to 500 million barrels of oil.
At the same time, ExxonMobil Canada announced it is ready to sell or trade its stakes, ranging from 25 percent to 33.3 percent, in nine exploration blocks near the Hebron-Ben Nevis field.
Adding to the increasingly cloudy future is street talk that Husky Energy Inc. and Petro-Canada may pass up the chance to proceed with their C$2.3 billion development of the 240-million-barrel White Rose field, scheduled for a 2006 start-up at about 100,000 barrels per day. Hibernia struggling That would leave Newfoundland with only the Hibernia and Terra Nova fields in production, while the region hasn’t produced a single new discovery in more than a decade, despite the investment of hundreds of millions of dollars in exploration and lease-buying and has seen a sharp downward trend in land sales since 1985, with average per acre prices slumping from C$291.57 to a mere C$4.90 in 2001.
On top of that, the Hibernia field, afflicted with operational breakdowns, has struggled to maintain an average 140,000 barrels per day and has never come close to its goal of 178,000 barrels per day, while the Terra Nova field come on stream in January, one year late and 50 percent over budget.
Against that backdrop, Chevron and its partners (ExxonMobil, Norsk Hydro Canada Oil & Gas Inc. and Petro-Canada) said that after a two-year evaluation they had concluded the development costs for Hebron-Ben Nevis would be too high to make the project economic. Heavier crude a factor Analysts say that playing into the decision were a number of factors, including the costs of recovering and refining the field’s thicker crudes, which range from 20 to 25 degrees API, at a time when heavier oil is selling at a discount and drilling costs are up to C$50 million a well.
Martin Molyneaux, with FirstEnergy Capital Corp., said Hebron-Ben Nevis was always a long shot because of its geological complexity.
“It’s not something we’re going to see developed in the next 10, 15, 20 years” so long as oil prices remain in the $20-$25 a barrel range, he said.
Gord Currie, an analyst with Canaccord Capital Corp., said the combination of a “border-line” project and cost overruns at Hibernia and Terra Nova meant the “chances of bringing it on budget were slim.”
Jim Simpson, president of Chevron Canada Resources, said Hebron-Ben Nevis “is an extremely complex project which poses significant technical challenges.
“Current technology would require a greater number of wells to be drilled, which would add significantly to the capital investment.
“Given the high-cost environment in Eastern Canada, we determined the economics can’t support moving forward at this time,” he said. International competition A spokesman for ExxonMobil’s Canadian unit said the decision to put exploration licenses up for sale should not be viewed as declining interest by the company in the East Coast.
“There’s an effort to see if there is an interest in these exploration properties,” he said. “That doesn’t mean that we don’t evaluate future opportunities as they arise and it doesn’t mean we’re not committed to Newfoundland,” he said.
Newfoundland Energy Minister Lloyd Matthews said Chevron’s decision was “not a positive or good news announcement. But it gives us the opportunity to realize that in this industry we are challenged every day to be competitive on an international basis.”
He said it’s clear that the declining level of exploration spending and activity over almost 20 years “has led us to circumstances today where we have no new, imminent, major, offshore mega oil and gas projects.”
Ed Foran, chairman of the Newfoundland Ocean Industries Association, representing 450 offshore supply-and-services companies, said Chevron’s decision was disappointing but not surprising.
“Chevron has been very public in the discussion of issues they face in development of the Hebron field,” he said. “But they also continue to speak well of the asset and their desire to hold it.” White Rose decision by mid-year The future now hangs by a slender thread, with Husky and Petro-Canada promising a decision by mid-year on White Rose.
Husky, as 72.5 percent operator, has the added complication of an uncertain future. The smallest of Canada’s five integrated oil companies, it came close to being sold last fall and is seen by analysts as reluctant to make such a major decision ahead of any potential ownership change.
Duncan Mathieson, an analyst with Scotia Capital, said the White Rose reserve base is “right at the margin” of being economic, but development could go ahead provided the partners can keep the lid on costs.
The greatest risk for Newfoundland is that the infrastructure now in place to develop smaller fields will be wasted if White Rose is shelved or abandoned.
Petro-Canada has shown a growing coolness to White Rose, with chief executive officer Ron Brenneman telling analysts in a recent conference call: “White Rise, in our mind, has always been at the margin.”
The cracks appearing in Newfoundland have also opened discussion about the impact of corporate consolidation in recent years and what that means to industry priorities.
The super-majors have such huge portfolios to pick and choose from that dubious projects, like those in Newfoundland, can be dropped even lower on their lists.
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