With Hebron deal, N.L. gambles on future price of oil

The government of Newfoundland and Labrador admitted it made some compromises to get a tentative deal on the Hebron oilfield project, offering oil companies a discount on royalties early on, in exchange for a bigger share after the project pays for itself.

Provincial Natural Resources Minister Kathy Dunderdale said Thursday it's a gamble on the future price of oil, a gamblethat the government believes will pay off.

In exchange for the initial frozen royalty rate, Newfoundland and Labrador promised a royalty regime that could prove lucrative — with royalties that increase with the price of oil.

Dunderdale said those royalties kick in later in the project, after all costs are covered and only if oil remains above $50 a barrel. She said she's confident in the province's gamble.

"You know, it's going to be a long time by anybody's estimates that we're ever going to see oil less than $50 a barrel," Dunderdale said. "We gave something on the downside which is low-risk to us to achieve a very high gain on the upside."

Usually in offshore projects, oil companies pay escalating royalties to the provincial treasury as the companies pay off the cost of developing the field.

But in the memorandum of understanding for the Hebron field, announced Wednesday, the royalty rate paid to the province is frozen at one per cent until that cost is paid, meaning the partners in the Hebron deal are getting a favourable deal for the first few years of the project.

Chevron Canada, with a 28 per cent stake in Hebron, is its designated operator. ExxonMobil Canada has, at 37.9 per cent, the greatest ownership stake, whilePetro-Canada, and Norsk Hydro Canada Oil & Gas are the remaining partners.

If the $16-billion Hebron deal goes ahead, construction could begin in 2010.