Nalcor awaiting info before acquiring Flemish Pass equity

Newfoundland and Labrador’s energy corporation is waiting for more work from Statoil and Husky before determining the next steps in acquiring an equity stake in any possible oil development in the Flemish Pass Basin.

When the companies signal they have a plan to move towards the production phase for the new discoveries, Nalcor and the province will get involved.

The 2007 energy plan enshrined a policy for Newfoundland and Labrador to take an equity stake of up to 10 per cent in all future oil projects.

“Right now, our 10 per cent is dependent upon Statoil and Husky’s further delineation, further study work,” said Jim Keating, vice-president for oil and gas with Nalcor Energy.

“And when it puts together what it believes to be a commercial-grade project, and presents to government and to Nalcor that data, we’ll make a determination at that time – a business determination, based on cost, revenues, and risks – to acquire that 10 per cent.”

Last week, Statoil announced that it has discovered between 300 million and 600 million barrels of recoverable oil at Bay du Nord in the Flemish Pass Basin.

Bay du Nord is one of three sites being assessed in the area, which represents a new frontier for the Newfoundland offshore.

Earlier this year, Statoil said that nearby Mizzen holds about 150 million barrels. Numbers have yet to be released for Harpoon.

This summer, Statoil officials indicated that they required roughly 250 million barrels to make the Flemish Pass a viable basin.

Estimated reserves are now well beyond that threshold.

Statoil holds a 65 per cent interest in those three sites, with Husky holding the other 35 per cent.  

What is equity?

The equity policy allows the provincial government, through Nalcor, to buy a stake in producing oil projects.

For a 10 per cent stake, Nalcor would pay 10 per cent of the historic costs associated with the licences and all previous exploration wells drilled. “That’s our entry fee,” Keating said.

“What that does, it protects Nalcor – and the people of the province – from our exploration risk. We don’t take any risk in dry holes.”

He said 10 per cent seems to be right amount for the buy-in – “not too high, to put undue risk to Nalcor or the province, but high enough to be meaningful.”

What that does, it protects Nalcor – and the people of the province – from our exploration risk. We don’t take any risk in dry holes.- Jim Keating, Nalcor Energy vice-president

In the simplest terms, equity allows the province to get a piece of the revenues, in return for paying its share of start-up and ongoing costs associated with oil projects.

When operating costs are on budget and the price of oil is high, equity can be lucrative.

But if costs spiral and the price of oil plunges, equity is a riskier bet.

Nalcor has a 4.9 per cent interest in Hebron; five per cent in North Amethyst, West White Rose and South White Rose Extension; and 10 per cent in the Hibernia Southern Extension.

The energy corporation said it has spent nearly $530 million on its three projects since first acquiring equity interest in 2008.

Nalcor expects to spend an additional $830 million to bring all projects on stream by 2017. 

But despite those expenditures, according to Keating, the math is working out for the province.

This year, he said, Nalcor will get $70 million in revenue on $25 million in costs associated with current equity stakes in the White Rose and Hibernia extensions.

Keating said the best days will come around 2017 to 2018 when first oil is pumped at Hebron, resulting in an estimated $350 million to $450 million a year in total equity-related revenues from all fields.

‘Very common around the world’ 

Such arrangements are “very common around the world,” the Nalcor vice-president said.

Statoil itself started as a state-owned company, he noted, much the same way.

 “We don’t see that this is an issue at all,” Keating said.

Last week, Statoil vice-president of exploration Geir Richardsen told CBC News that the question of equity is something the company expects.

“We see that as something which probably will happen and that’s up to the government and Nalcor … to decide on those issues,” Richardsen said.

‘Tremendous news’

Keating called the Statoil announcement about Bay du Nord “tremendous news” for the province.

“Not since 1984 have we found a standalone commercial discovery in our offshore, and in a new basin,” he said.

“So it’s 30 years in the making, and it couldn’t come at a better time for Newfoundland and Labrador.