Guest Post by Ron Penney
We’ve
been told that the drop dead date for the sanctioning of the refit for the
Terra Nova FPSO is June 15th and that the decision must be unanimous among the
partners. Every indication is that there isn’t unanimity and that the likely
result will be that the refit will not go ahead and the field will be
decommissioned and abandoned.
The
Official Opposition has disclosed a briefing note from provincial officials on
the possibility of the province taking an equity position in the project. This
would have been a mistake given our dire fiscal situation. We can’t afford to
take any more risks. Muskrat Falls, I rest my case.
I’m
pleased that the government just announced that they aren’t going to go down
that road.
Taking
an equity position would require even more borrowing, exposing ourselves to further credit rating downgrades, already trending
downwards. Once the ratings get to the point that they are no longer investment
grade, they would be junk bonds attracting higher rates of interest, assuming
anyone would lend us more money.
The
Government is facing a lot of pressure from the labour unions to take an equity
position, and that is perhaps understandable given than their jobs are at
stake, but they, like everyone else who wants the Government to spend more,
continue to ignore our fiscal situation. We just can’t borrow more money for
equity positions in anything, including Gull Island. We’re broke.
If
we had kept increases in our expenditures to the Maritime average, since we
started to get vast amounts of royalties, we would have had a rainy day fund of
$10 billion which could have been used to take an equity position, but we
didn’t and we are instead $47 billion in the hole and climbing.
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| Terra Nova FPSO 2006 |
It
is true that the Federal government did take an equity position in Hibernia
when one of the private sector partners pulled out. While at the time this was
heavily criticized, it proved to be a very good investment for the Government
of Canada, one which allowed it to recently return much of the future profits
to the Government of Newfoundland and Labrador.
The
Government of Alberta took a billion dollars in equity in the proposed Keystone
pipeline, which will be lost as the project has been cancelled.
The
present Government of Canada also purchased the Trans Mountain Pipeline, so
there is precedent for it taking an equity position in the oil and gas sector.
If there is to be government equity in
the Terra Nova project it has to come from the federal government. However,
given that the Government of Canada will likely have to honor their loan
guarantee for Muskrat Falls their appetite for further energy investments in
our offshore appears unlikely.
We
have equity in the West White Rose Project, which is presently suspended and on
shaky ground. If it is terminated our investment of $110 million will be lost.
The partners in that project are also looking for an additional equity infusion
from the province.
The
better approach is to adjust our royalties, as was proposed, so that they
reflect the additional capital costs for the refit of Terra Nova. Our royalties
are a tiered system with the highest royalties being paid when the production
assets are fully paid for, which would be the case with Terra Nova.
I
note that the Minister has made that offer. I trust that in the event it is
accepted it has a provision to ensure
that we get a share of any upside should more oil be recovered and/or prices
increase then presently predicted.
Since
production commenced in 2002 the Terra Nova has produced 425 million barrels of
oil. There are another 80 million barrels left to be produced.
That
brings me to another possible approach to ensure that production resumes, which
I haven’t seen mentioned in the public debate.
I
helped negotiate the Atlantic Accord and, along with John Noel, the Senior
Legislative Counsel at the time, we negotiated the implementing legislation
with federal officials, the Canada-Newfoundland Atlantic Accord Implementation
Act, which in addition to legislating the joint management system and ensuring
we were the principal beneficiary of oil and gas off our shores, set up the
regulatory system for managing the resources through the Offshore Petroleum
Board.
That
system provides a comprehensive scheme for how oil and gas exploration occurs,
and how successful discoveries are brought into production and properly and
safely operated.
Part
lll of the Act deals with petroleum operations and the creation of a position
known as the Chief Conservation Officer.
One
of the purposes of that Part is “the conservation of petroleum resources”.
Those are scarce and valuable resources, which have provided over $22 billion
in revenues over the years, not that we have much to show for it. We badly need
those royalties and economic activity in the future if we are to survive as a
self governing province.
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| Terra Nova FPSO 2020 |
The
Chief Conservation Officer has the authority under section 153 (1) to issue a
production order in order to prevent “waste” of the petroleum resources in a
reservoir.
Given
that there are 80 million barrels of oil still in the reservoir and some of the
partners, including the operator,
Suncor, support the refit of the Terra Nova, and it appears that the economics
of the refit are positive, it would be “wasteful” in the extreme to allow the
reservoir to be abandoned and the potential stream of royalties, and taxes in
the hundreds of millions of dollars, to come to a premature end.
It
is a common principle in regulatory schemes for the exploitation of oil and gas
around the world that all economic reserves must be produced. There is no
tolerance for high grading the resource and leaving perhaps lower profit
reserves in the ground.
It
will be recalled that the benefits agreement for Terra Nova required the engineering
for the project to be moved back to Newfoundland and Labrador from Leatherhead
in England. Regrettably the Offshore Board did not enforce that requirement.
The
Offshore Board failed us once on Terra Nova. They shouldn’t fail us again. Have
the Chief Conservation Officer exercise his or her authority and order that the
remaining reserves be produced and not left in the ground.
There
are serious concerns about the Board’s oversight of the Terra Nova project. How
was the FPSO allowed to deteriorate to the point where the Board had to shut it
down for safety reasons? How could the companies allowed the apparent running
down of the FPSO?
There
is a theory called “regulatory capture” which describes over time how a
regulatory body gets “captured” by the companies it is supposed to regulate. I
fear that is what happened to the Offshore Board.
If
the companies won’t extract the remaining reserves, or the Board doesn’t issue
a production order, then they should pay us the $1.5 billion dollars in royalties
and taxes which would have come to the province. It is totally irresponsible
for them instead to ask this impoverished province to invest in the project.
So
I won’t be joining the protest at the Confederation Building Monday. It’s
happening at the wrong place. I’d join one at Exxon Mobil or Husky. The oil
companies have made hundreds of billions
of dollars from our resources and they have the obligation to make the right
decision with respect to Terra Nova and not look for a handout from us. It is
time that they act as good corporate citizens.
