The decision by Equinor (formerly Statoil of Norway) and Husky
Oil to further assess the feasibility of developing the Bay du Nord oil field,
located some 500 km offshore in the Flemish Pass region, represents good news
for the province. Unfortunately, the Ball Government turned what was a good
news day on July 26, 2018 into one of disappointment and disbelief.
That the provincial government thinks it is solvent enough,
knowledgeable enough, or savvy enough to deal with one of those major oil
companies — with their mixed portfolio of huge capital assets — is a prolongation
of the same pretense that facilitated the reckless decision to sanction the
Muskrat Falls project.Equinor, the lead player in the Bay du Nord development, and Husky plan to spend millions of dollars studying the field and looking at the best way to develop the structure. They will develop cost projections for both construction and operations. If the numbers are attractive enough, they plan on sanctioning the project within two years. Presumably, if the development costs and oil prices don’t align, it will be put on hold or cancelled altogether.
Bay du Nord is located in a remote deep-water field containing (based upon current estimates) in the range of 300 million barrels of oil — a number which many industry analysts consider a marginal reserve.
The Province’s stake comes at a cost of $89.4 million,
representing 10% of the costs of exploration and other expenses to the end of
2017. The public will be responsible for the same share of planning and
engineering costs on an on-going basis, which will run into the tens of
millions. If, on further assessment, the project is cancelled for any of a host
of reasons, those are sunk costs for the Province.
Ultimately, the go/no-go decision will be made by the two
major oil companies having rights to the field.
NL’s fiscal position is precarious at best. We are buying into
a high-risk gambit with 100% borrowed money.
That is the risk issue.
Another underscores why the Province cannot — should not —
attempt to wear two hats. The public
might consider this question: what if Equinor and Husky decide that they need
more concessions as a condition of proceeding with the project? Faced with such
a choice, on what basis would the province not cave?
More and more questions arise. For example: Why does the
Premier think he has the right to borrow money we don’t have? Why would we wait
for a return that may never arrive unless literally every aspect of the project
goes okay?
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| Location Bay du Nord field (CBC Photo) |
Where does our sense of invincibility come from, and on what
basis is it justified? Why is it that an assessment of “risk” plays no role in
our decision-making?
There is also the matter of jobs: the very issue on which
every project built in NL hinges.
As the deal is currently structured, and assuming that the
project does proceed, the scant opportunities available to tradespeople will consist
of the most unsophisticated work on the project.
Since the construction of the Hibernia platform, Governments
have negotiated the amount of work that the Owners must commit to the local
workforce. The Ball Government’s press release suggests that 5000 tonnes of
local fabrication will be performed here. The work seems to be associated with
mooring/anchor systems and the construction of subsea systems. There is no
mention that any module of the Floating Production System (FPSO) will be built
in NL.
In the case of the Terra Nova and White Rose projects, the
“topsides” work was huge. In both cases, the bare hulls came to NL for topside
outfitting. 60% of the Terra Nova topsides were fabricated in NL; local
fabrication on the SeaRose was over 90%. Installation of the topsides,
outfitting and commissioning all took place in NL.
The documentation released so far suggests that the Bay du
Nord FPSO will arrive complete, likely from Norway.
Also by "Agent 13"
The Government promises “4 million person hours in
pre-development and development phases.” If the number had been converted to person
minutes, it could have “appeared” even higher! But PR flourishes aside, the
estimate is likely not even close to being correct.
Person years of work on these projects is measured by a
formula representing the average per “tonne”. With the complex “topsides”
constructed elsewhere, the remaining mix of work simply won’t warrant the same
equation. In other words, the person years/hours of work on mooring/anchoring
systems is far less per tonne than on topsides infrastructure.
What the Government is saying is likely untrue unless it fully
describes the specific work to be performed and the international standard for
person hours/days of work associated with each component.
Note that the Government’s press release states that the “fabrication
of the hull, turret, flowlines, umbilicals, and other components will be
international.” That leaves only the mooring/anchoring and subsea systems.
Little wonder person years of work have been converted to “person hours”.
On this account, we have heard no opinion from the Building
Trades Council. We have heard nothing from Marystown, the Shipyard Union, Peter
Kiewit, Clarenville or the many, many other small yards and contractors from
around the Island that, in the past, have benefited from oil-related projects.
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Bay du Nord Framework Agreement (Technical Briefing July 2018
by Department Natural Resources)
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Bay du Nord Framework Agreement (Technical Briefing July 2018
by Department Natural Resources)
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Perhaps they lack a leadership capable of recognizing when
they have been left out of a major piece of work. Possibly, they are disabled
by international affiliations or local politics and are unable to object when
resource development does not reflect our capabilities, employment needs and
human resource potential.
Whatever the case, as this deal stands, the higher-skilled
work will go elsewhere: out of the province. With little fabrication work for
NL, the 10% equity stake makes even less sense.
At minimum, the complete documentation on this deal must be
released to the public. Nalcor Oil and Gas should also release a summary of the
total equity investment made to date, the anticipated level of investment
required prior to Decision Date and, based upon current knowledge, the anticipated
rate of return from the investment.
Finally, it is worth noting that, prior to the arrival of
Premier Danny Williams, the NL offshore worked very well without Nalcor Oil and
Gas. We had a competent Natural Resources Department and the C-NLOPB was an
effective administrator, managing lands, discovery applications, exploration
licenses and benefits agreements, negotiated by the Province. The system worked
well and the Province took no risks that would impair the public Treasury.
Williams’ idea of an energy warehouse fundamentally changed
provincial policy, shifting risk onto the public. It seems that nothing has
been learned, having permitted billions of dollars to be placed in the hands of
inexperienced public servants and squandered.
The Province has no equity; it has to borrow and thereby risk
capital funding on which those reliant on health and social services should be
able to depend.
My advice to the Premier: stay out of the oil game, Sir.
Govern the Province.
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Editor's Note:
Most readers will know "Agent 13" as one of the good guys, a support for "Agent 86"
Most readers will know "Agent 13" as one of the good guys, a support for "Agent 86"
(Max) on the 70s TV Series, “Get Smart”.
Field reconnaissance missions were his
specialty, hiding in unlikely places such as
mailboxes, lockers, trash cans, and fire
hydrants to pick up information.
Today’s contributor is a professional whose career includes
myriad construction
industry projects including for the offshore. He
has already written on the Uncle Gnarley
Blog.
The pseudonym Agent 13 reveals his humourous side. But
on public policy
matters, as you might have discovered, he is deadly
serious.