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Energy and Resources Newfoundland and Labrador offshore drilling nearing crossroads

Aboard Husky's SeaRose FPSO. Husky is the operator and has a 72.5 percent working interest in the White Rose offshore oil project, while Petro-Canada holds 27.5 percent. It is the third major offshore project off Newfoundland in the Jeanne d'Arc Basin following Hibernia and Terra Nova.

Husky Energy Inc./Courtesy of Husky Energy Inc.

International oil companies active in Newfoundland and Labrador's offshore say they remain committed to expensive exploration programs there, even as the provincial government tries to cope with a looming fiscal crunch caused by low oil prices.

Following major discoveries in the deep water of the Flemish Pass, Norway's Statoil OAO and Calgary-based Husky Energy Inc. are proceeding with drilling programs in the province while they cut spending in other areas. And other companies continue to pursue long-planned projects to bring on new production.

But the province's oil industry faces two key tests in the next month or so: The federal-provincial regulatory board is auctioning five offshore parcels with bids closing on Dec. 12, and Husky is due to make a final investment decision on a new drilling platform to expand its White Rose project.

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Those decisions are being made at a time of greater-than-usual uncertainty about the future price of oil. Producers in Newfoundland set their prices against North Sea Brent, which has fallen 40 per cent since reaching $115 (U.S.) in June. The global benchmark has fallen $11 to $69 a barrel in the past 10 days since OPEC decided not to cut its official production quota.

The Progressive Conservative government had anticipated an average Brent price of $105 for the fiscal year which began last April, and is now reckoning it will come in around $90. The provincial government gets roughly a third of its revenues from oil royalties and equity interest.

Memorial University economist Wade Locke figures the government will see a $200-million shortfall on a budget of $6.5-billion this year, and a $500-million drop in budgeted revenues next year if prices remain low, as most analysts expect.

The government has already frozen discretionary spending, and Finance Minister Ross Wiseman warns of tighter spending and higher deficits as the province heads into an election year.

In an interview, Mr. Wiseman said the provincial economy remains strong and production in the offshore will begin to grow in two to three years, when new projects come on stream. But in the meantime, the government will have to keep a rein on its own spending, which accounts for roughly 30 per cent of the provincial economy.

"We need to be really focused on how we manage our way through a two- or three-year period so we're well positioned to take advantage of the opportunity that will exist at the end of that period," he said.

"We've got to be pretty measured… You can't have a knee-jerk reaction and start making massive cuts and laying off a large number of people."

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While the price drop is taking a significant bite out of provincial revenues, there is no indication at this point of a slowdown in the industry, said Jim Keating, head of oil and gas for the provincially-owned Nalcor Energy, which takes a stake in all new offshore projects and provides seismic data for international exploration companies.

"We haven't seen any real decline in interest or plans – stated or otherwise – with regard to the companies that are progressing their projects or, more importantly, companies that we are talking to on the exploration front," Mr. Keating said in a telephone interview from St. John's.

Still, he said the auction for five deep-water parcels will be a bellwether to determine if companies are prepared to commit to further exploration, and whether the roster can be expanded beyond Statoil and Husky, which already have drilling programs under way.

"The first test point we're going to see is the results of the land sale," he said. "We'd like to see competitive bids for at least three of the five parcels and at least one new entrant."

Statoil – with Husky as a minority partner – is in the early stages of an 18-month drilling program to appraise its 2013 discovery at Bay du Nord – which the company said could contain between 300 million and 600 million barrels of recoverable crude.

"Offshore Newfoundland is a core priority for our global exploration," company spokesman Knut Rostad said in an e-mail from Olso. "It is important for Statoil to continue to gain a better understanding of the resource and economics of Bay du Nord and the Flemish Pass basin."

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Husky is currently completing one extension of its White Rose project, which ties back to its existing structure and is due to produce first oil early in 2015.

But the big, looming decision is whether to proceed with $2.5-billion White Rose extension that would include a concrete drill structure; the company is currently finalizing work on the dock where the concrete base will be constructed and expected to make a final investment call early next year.

Separately from work with Statoil, Husky is awaiting the arrival of a drill ship this month and will begin drilling an exploratory well in the deep water near the Flemish Pass.

At the same time, the consortium led by Exxon Corp. is proceeding with the $6.4-billion Hebron project, which is expecting to begin producing in 2017 and will offset declines in older field well into the next decade.

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