Premier Danny Williams added a key piece in his long-term plan to keep oil revenues flowing into Newfoundland and Labrador, taking a conciliatory approach to partnering with major international oil companies on risky projects.
Often criticized for his fiery resource nationalism, The populist Mr. Williams on Tuesday announced an agreement-in-principle with the Hibernia consortium, led by Exxon Mobil Corp., in which the province will pay $30-million for a 7.8-per-cent stake in the long-stalled Hibernia South project.
The province will also receive super-royalties, rising to a 50-per-cent royalty rate on some production if the benchmark North American price exceeds $70 (U.S.) a barrel. The Hibernia deal will yield the province some $10-billion in revenues, the government estimated, and would help fill a critical revenue gap as the main Hibernia field declines, prior to the $7-billion Hebron project coming on stream in 2017.
The agreement caps a four-year process after Mr. Williams put the oil industry on notice that all future development would have to include a provincial ownership stake, a move that earned him the sobriquet “Danny Chavez,” after Venezuela's socialist President Hugo Chavez, who has had running battles with foreign oil companies.
Since then, his government has reached deals on three separate offshore projects, a 4.9-per-cent stake in Hebron; a 5-per-cent share in Husky Energy Inc.'s White Rose extensions, and now for an equity role in the Hibernia extension.
“These extensions – the White Rose extension and the Hibernia South extension – will come on at a very opportune time and hopefully can level out our production,” Mr. Williams said in an interview.
“Without these, we'd be in declining production in the existing fields.”
“What we see today is another shot in the arm,” said Ron Ellsworth, deputy mayor of St. John's. “It reinforces the confidence of the Newfoundland economy.”
The demand for equity has been a key theme in Mr. Williams' premiership, including his promise during the 2007 election race that there would be “no more giveaways” and that Newfoundlanders and Labradoreans would be “masters of our own destiny.”
It was a populist campaign, tapping a deep vein of resentment among residents that the province's resources have for decades enriched others. It worked. Mr. Williams returned to office with an increased mandate and is still now riding high in the polls.
While there have been complaints that oil wealth in the increasingly prosperous province has been slow to trickle out of the St. John's area, the capital is booming. Real estate figures from April show that average house prices rose by more than 16 per cent in the past year and there is almost no class-A business space to be had.
Mr. Williams has modelled his approach on oil-rich Norway, which pays for its equity participation and contributes to the construction costs in North Sea projects though its widely respected state-owned company, StatoilHydro ASA.
“The Newfoundland government has looked at the Norwegian model for years and liked that approach to developing oil and gas resources,” said Paul Barnes, St. John's-based vice-president of the Canadian Association of Petroleum Producers. “And many of the industry players that are active here are used to working with that model.”
With the Hibernia agreement, the province will gain a 10-per-cent equity stake in three of four blocks slated for production; the three are estimated to contain 170 million barrels of oil. The province agreed to forego its equity claim on another 50-million-barrel block, which lays closest to the existing Hibernia gravity-based structure and will be developed first, because it is part of the original production licence.
“I do feel some satisfaction that we are working together to try to overcome any obstacles to developing the industry down here,” Mr. Williams said. “I feel good for the people of the province.”
He said the Hibernia South project will be an important contributor to the province's economy, generating $10-billion for the provincial treasury and its oil company, Nalcor Energy. The Canadian government would reap some $3.6-billion from the extension of Hibernia, which was Canada's first offshore project, producing some 700 million barrels of crude since 1997.
While the extension won't provide the large number of construction jobs that the original project did, it will employ drillers, and supply ships and fabrication plants in the area that are already humming with work.
Glenn Scott, president of ExxonMobil Canada, said the deal is a good one for the province and for the companies in the Hibernia consortium.
“The Hibernia southern extension will provide meaningful benefits to the province in terms of royalties, equity participation and jobs, as well as meaningful returns to investors in Hibernia,” Mr. Scott said.