BUSINESS

ROILING THE WATERS

GULF’S DECISION TO PULL OUT OF HIBERNIA CASTS A SHADOW OVER THE ECONOMY OF NEWFOUNDLAND

JOHN DeMONT February 17 1992
BUSINESS

ROILING THE WATERS

GULF’S DECISION TO PULL OUT OF HIBERNIA CASTS A SHADOW OVER THE ECONOMY OF NEWFOUNDLAND

JOHN DeMONT February 17 1992

ROILING THE WATERS

GULF’S DECISION TO PULL OUT OF HIBERNIA CASTS A SHADOW OVER THE ECONOMY OF NEWFOUNDLAND

BUSINESS

The announcement was to have landed on Newfoundland Energy Minister Rex Gibbons’s desk at 8:30 a.m. on Tuesday, Feb. 4. When it failed to arrive, Gibbons said later, he assumed that Gulf Canada Resources Ltd. executives had changed their minds and decided not to sell a 25-per-cent stake in the $5.2-billion project to develop the Hibernia oilfield, 305 km southeast of St. John’s. His sense of relief, however, was short-lived. That afternoon, Gulf president Charles Shultz told Gibbons by telephone that Gulf was about to issue a statement confirming its intention to pull out of the megaproject. The Newfoundland oil minister played down the significance of the development when he met with reporters later in the day. “We still have three strong, vibrant partners,” he declared. But by week’s end, many Newfoundlanders were unsure if any other company would take

Gulf’s place—and whether their dreams of offshore riches had suffered a fatal setback.

Gulf’s decision leaves a cloud of uncertainty over a megaproject that already appeared to be of dubious economic viability. Indeed, analysts

said that Gulf itself had approached more than 70 companies in the past 15 months in an unsuccessful attempt to find a buyer for its interest in Hibernia. And federal Energy Minister Jake Epp ruled out any possibility that Ottawa would pump more money into the project beyond the $2.7 billion in grants and loan guarantees that it has already offered. Declared Christine Fagan, president of the Newfoundland Ocean Industries Association, a St. John’s-based group that represents companies hoping to benefit from the offshore oil industry: “We’ll have no comfort until we know how Gulf’s obligations will be met and how committed the remaining partners are to completing the project.”

Newfoundlanders have been waiting for Hibernia to produce oil ever since Mobil Oil Canada Ltd. discovered the huge offshore field in 1979. But it took 11 years of struggle before

LOCK/FIRST LIGHT

Ottawa, the Newfoundland government and a consortium of oil companies—Mobil, PetroCanada, Gulf Canada and Chevron Canada Resources Ltd.—signed an agreement to develop the project. The field contains an estimated 525 million barrels of recoverable oil—roughly equal to Canada’s annual consumption.

The province has already felt the initial benefits of that agreement. More than 1,000 people are now at work preparing a massive construction site off Trinity Bay on Newfoundland’s east coast, 160 km west of St. John’s. In April, as many as 3,000 workers are scheduled to begin work on a reinforced concrete base for the offshore production structure. Largely as a result of the project, economists have predicted that Newfoundland’s economy would expand by at least five per cent in 1992—the fastest rate of growth this year in Canada. Said Wade Drover, the mayor of Sunnyside, a village of 700 people 10 km from the construction site: “Everything here is on the upswing. Hibernia has been a tremendous blessing.”

To defray the enormous costs of bringing the field into production, Ottawa has pledged $1 billion in grants and $1.7 billion in loan guarantees—the equivalent of $100 for every Canadian. Under the agreement, Ottawa’s transfer payments to the province would fall by 97 cents for every dollar that the Newfoundland government received from the field in royalties. But the Mulroney government’s principal motivation was to create jobs—and, presumably, to increase its popularity in the province. Declared James Doak, an analyst

with the Toronto-based investment firm First Marathon Securities Ltd.: “The only reasons that Hibernia must go ahead are political.”

The biggest single obstacle to construction is the relatively low price of crude oil—currently $23 a barrel on world markets. Most analysts say that the price would have to rise to at least $30 for Hibernia to be profitable. In fact, weak oil prices have wreaked havoc in the Canadian energy industry recently, leading companies to slash their workforces and sell assets in a desperate effort to reduce their losses. Last year, Petro-Canada, Amoco Canada Petroleum Co. Ltd. and Shell Canada Ltd. all announced major cutbacks. And last week, Imperial Oil Ltd., the country’s biggest petroleum company, announced that it plans to cut 1,700 jobs from its 11,000-member workforce and close about 1,000 of its 3,200 service stations.

Gulf, which is controlled by Olympia & York Developments Ltd., the Reichmann family’s Toronto-based real estate company, is caught in a similar squeeze. Last week, the company, which has already spent about $300 million on Hibernia, said that it could not afford to invest a large proportion of its resources in a project that will not produce profits for several years—if ever. Declared Shultz: “Our business environment has become very onerous.”

The same forces that compelled Gulf to leave the project make it unlikely that another major oil company will be found to inject new funds into Hibernia. “Don’t forget that we are talking about an industry that is not exactly flush with cash,” said Kenneth Fair cloth, a Toronto-based oil analyst with Richardson Greenshields of Canada Ltd. Petro-Canada executives have already said that they are hoping to cut their 25-per-cent stake in the project in half because the company’s commitments to Hibernia are consuming too much of its cash flow. The chances of finding a foreign buyer for Gulf’s stake also appear slim—even though Epp said last week that the federal government would be willing to waive its 50-per-cent Canadian ownership rule on the project in order to attract another partner into the consortium.

Despite the pessimism, representatives of the Newfoundland government and the remaining consortium members insisted that the project was not in any immediate jeopardy. “The owners are actively pursuing alternatives to deal with the withdrawal,” said Graeme Connell, a Mobil spokesman in Calgary. “Meanwhile, it is business as usual.” Others, however, have already concluded that the megaproject is dead in the water. Declared Ian Doig, the Calgary-based publisher of Doig’s Digest, an energy newsletter: “Ultimately, I think all sides will pack up and take their losses.” That would confirm what Hibernia’s critics have maintained for years—that Newfoundland’s offshore bounty is destined to remain buried deep below the sea.

JOHN DeMONT

RUSSELL WANGERSKY

DEIRDRE McMURDY

JOHN HOWSE