Newfoundland emerging as E&D hot spot

Patrick Crow
Energy Policies Editor

Oil Fields, Prospects Multiply Off Newfoundand [24066 bytes]

Newfoundland has emerged as an exploration and development hot spot.

The long-delayed completion of Hibernia field development on the Grand Banks has sparked efforts to develop other discoveries off Newfoundland's eastern coast (OGJ, July 15, p. 17).

In addition, industry is scrambling to join a sizzling new play on and off the west side of the island province.

Meanwhile, the provincial and federal governments continue efforts to provide incentives to keep the boomlet alive.

Potential seen

Newfoundland Premier Brian Tobin said, "Newfoundland's offshore sedimentary basins have been explored for the past 3 decades, and for every six wildcats drilled, there has been a significant discovery consisting of technically recoverable reserves. Twenty-one of these discoveries have been made to date off Newfoundland and Labrador.

"After an expenditure of approximately $3.8 billion (Canadian) to drill 140 exploration and delineation wells and to conduct approximately 600,000 km of seismic surveys, many regard the Newfoundland offshore as a highly prospective area."

He said that so far the oil industry has discovered about 1.6 billion bbl of recoverable oil, 4 tcf of natural gas, and 237 million bbl of natural gas liquids.

"The Geological Survey of Canada estimates that a further 5-6 billion bbl of oil remains to be discovered in the northern Grand Banks areas alone. This resource is located on a vast continental margin with an area of about 1.6 million sq km, more than 14 times the areas of the land mass of the island of Newfoundland."

He said oil activity on and off Newfoundland also is heating. "New players are appearing with each land sale. Interest in land sales is growing at an unprecedented rate, not only in western Newfoundland but also on the Grand Banks. We consider this to be indicative of increased exploration in the future with a high potential for more significant discoveries."

Tobin said, "By the year 2005, production from Newfoundland's offshore area could reach 300,000 b/d and represent up to 30% of Canada's light oil production. When Hibernia and Terra Nova alone are producing at capacity, that figure will be close to 20%."

The Newfoundland Premier told a recent meeting of the Newfoundland Ocean Industries Association (NOIA) in St. John's, "The oil industry in Newfoundland is on a roll, and we have to maintain the momentum."

Western Newfoundland

The West Coast of Newfoundland, onshore and off, has seen a burst of activity in the past 18 months. A lease sale in March drew bids on all but three of the tracts offered (OGJ, Apr. 1, p. 28).

Provincial Energy Minister Rex Gibbons said that in the last 18 months about 1,100 km of seismic data havebeen collected, four wells were drilled, and the province held its most successful onshore land sale ever.

He said, "Bids totaling $21 million were selected on 28 of the 31 parcels offered, and cover an area of nearly 900,000 hectares. Security deposits were received for 27 of the 28 parcels receiving successful bids, and exploration permits are being issued."

Dominating the sale were Hunt Oil Co. and PanCanadian Petroleum Ltd., which apparently found hydrocarbons in a tight hole, the 1 Port au Port southwest of Cape St. George. They now are drilling the St. George's Bay A-36, about 6 km southwest of Cape St. George in 80 m of water.

In the disappointment column, Talisman Energy Inc. recently had a dry hole at the Long Range A-09 well, drilled beneath St. George's Bay from an onshore site.

However, companies remain upbeat about Newfoundland's West Coast and believe that commercially viable fields will be found.

G.J. Macey, PanCanadian Petroleum Ltd.'s senior vice-president for exploration, said, "The surface has barely been scratched."

The future

A key indicator of industry's continuing interest in Newfoundland will be a provincial offering this fall.

Last March the Canada-Newfoundland Offshore Petroleum Board issued a call for bids on eight parcels totaling about 900,000 hectares. Four of the parcels are on the Grand Banks, and four are off the west coast of Newfoundland.

Companies have until Sept. 30 to submit work expenditure bids on the parcels. It is one of the largest land offerings off Newfoundland since the mid-1980s.

And if more fields are developed on the Grand Banks, they are unlikely to be as protracted as Hibernia development has been.

Duke Anderson, land manager for Amoco Canada Production Co. Ltd., predicted at the NOIA meeting that "technological breakthroughs will be the key to success in the area, and will enable industry to develop fields for much less than previously thought."

He said one way to do that is through "front end loading," using better and more complete planning in the early stages of a project.

Amoco plans to drill two wells in the Hibernia region the next 2 years, and Anderson said, "If we have a commercial oil find, we plan to develop it as quickly as possible. Moving properties from discovery to production in a 10-15 year time span is no longer acceptable."

Royalty regime

The Newfoundland government recently announced a royalty regime that will apply to the development of fields off Newfoundland and Labrador, except Hibernia and Terra Nova (OGJ, June 24, Newsletter).

Rex Gibbons, minister of mines and energy, said, "Sparked by the Hibernia and Terra Nova oil field developments, there has been renewed interest by the petroleum industry. Establishing a generic royalty regime will produce a framework that will benefit future oil developments.

"It will ultimately translate into more employment and a stronger provincial economy as well as provide government with a new source of revenue. The regime has been structured to ensure that we receive our fair share of the revenue from petroleum resources while at the same time promoting their exploration and development."

The government also said it would exempt all offshore petroleum related capital and operating expenditures from the province's retail sales tax.

The basic royalty is ad valorem, rising from 1% to 7.5% of gross revenue as production increases. The royalty is 1% until production of 20% of initial established reserves or 50 million bbl, whichever comes first. Then 2.5% applies until there is 100 million bbl of production, 5% until 200 million bbl, and 7.5% thereafter.

In addition, there is a two tier net royalty. Tier 1 is 20% of net revenue after a 5% rate of return plus the long term government bond rate. Tier 2 is 10% of net revenues after a 15% rate of return, plus the long term government bond rate.

The government said since the basic royalty begins at a low rate and increases as total production increases, there is an incentive to develop small and marginal prospects.

The regime also insures that the province will receive a royalty from every barrel produced and guarantees that if oil prices increase, royalties also will.

David Manning, president of the Canadian Association of Petroleum Producers, said the royalty regime will allow exploration and development companies to make decisions in a more stable fiscal environment.

Manning said an oil boom is unlikely, but, "Newfoundland is on the verge of reaping the benefits of long-term petroleum activity. The royalty formula will help Newfoundland attract investment and stimulate its economy.''

PanCanadian's Macey said, "The Newfoundland fiscal regime is certainly not the best nor the worst arrangement we've seen in Canada or internationally, but it will encourage us to continue exploration."