Surge in oil production helps Nalcor earn profit, though year-to-date losses continue

A rise in oil production driven by success at the Hibernia platform has helped Nalcor earn a small profit in its third quarter, though year-to-date losses continue at Newfoundland and Labrador's energy corporation.

Meanwhile, the troubled Muskrat Falls hydroelectric project is expected to begin producing commercial power later this month from the first of four generating turbines, and testing on new operating software for the transmission line from Labrador to the Avalon Peninsula will also begin this fall.

"Oil and gas assets continue to generate significant cash flows for the province through oil sales, as well as royalty payments," said Carla Russell, Nalcor's chief financial officer, on Monday.

She and CEO Stan Marshall delivered the latest financial portrait of the corporation that's struggling to complete Muskrat Falls while coping with the global pandemic.

Nalcor posted an operating profit of $17 million for the quarter that ended Sept. 30.

That's a $30-million improvement over the same quarter last year, when Nalcor posted a loss of $13 million.

But it wasn't enough to do away with the red ink for the first nine months of 2020 with year-to-date losses of $120 million, compared with a profit of $106 million for the same period in 2019.

• Plunge in oil price, demand pushes Nalcor to $137M loss after 2nd quarter

The losses are largely related to the drop in price and demand for oil because of the global pandemic, with Nalcor forced to take a $225-million writedown in the value of its oil investments in the first quarter.

But despite the repeated blows to the oil industry, Nalcor's oil and gas division continues to bolster the corporation's bottom line. With a $31-million profit last quarter, it was the only division in Nalcor to record a profit.

Nalcor has equity stakes in the Hebron, Hibernia South Extension and White Rose oil fields. All three performed well this year, with production surging at Hebron after new wells came online.

The company's share of production this year was just over 3.6 million barrels up to Sept. 30, which represented $171 million in revenue compared with $99 million from Nalcor's other operations.

Compared with the same period last year, oil production is up by more than one million barrels.

If not for a sharp drop in oil prices, oil profits would have been much higher.

According to Nalcor, the price for Brent crude — the benchmark used to trade offshore oil — averaged $38 US up to September, down from $65 US during the same period in 2019.

Meanwhile, work is continuing on the Muskrat Falls project. Marshall said commercial power from Unit 1 at the generating station on the Churchill River should be available by the end of November, and from Unit 2 by early next year.

There's also growing optimism that Muskrat Falls power could be delivered to the Avalon Peninsula in varying amounts this winter, which would help decrease the need for oil-fired electricity at the Holyrood thermal generating station.

Marshall said the company developing the computer software for the Labrador-Island Link from Muskrat to Soldiers Pond outside St. John's is making progress.

The software has been plagued by glitches and repeated delays, but Marshall said testing on a new version should commence in the coming weeks, which could allow for the delivery of power to the island portion of the province.

He said an interim solution has also been found for a hardware issue at the Muskrat Falls and Soldiers Pond converter stations.

In August, Nalcor reported what it called a "flash-over incident" at both stations that forced a halt to commissioning work on the transmission line.

Marshall said an investigation has revealed the source of the problem: fibreglass beams used as insulators that were "not cured properly" during the manufacturing process.

Nalcor has reported that almost all of the 350 fibreglass beams will have to eventually be replaced, with Marshall saying the contractor will pick up most of the cost.

However, he said a workaround has been found to allow commissioning efforts to resume.

Some $11.7 billion has so far been spent on the Muskrat Falls project, with the final in-service cost now projected to top $13 billion.

When it was sanctioned in 2012, the in-service cost was estimated to be $7.4 billion.

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