A province’s billion-dollar bonanza

JOHN DeMONT August 1 1988

A province’s billion-dollar bonanza

JOHN DeMONT August 1 1988

A province’s billion-dollar bonanza


Brian Peckford stood in the sweltering heat of a St. John’s hotel ballroom last week, the cocky, combative former outport schoolteacher who, only months before, was contemplating his retirement after nine years as premier of Newfoundland. But for Peckford, last week’s signing of an $8.5-billion agreement with Ottawa and an oil company consortium to develop the Hibernia oil-

field, 200 miles southeast of St. John’s, was a moment of pride and vindication. Peckford has built his political reputation in the bitter fight he has waged with the federal government to extract the maximum economic benefits of the Hibernia field for Canada’s poorest province. And last week, as a crowd of 2,000 Newfoundlanders roared their approval, Peckford’s long-cherished dream of offshore riches took a giant step closer to becoming reality.

Developing the Hibernia field — which is located about 300 miles north of where the Titanic sank in 1912—will be the largest and most expensive energy development ever undertaken in Canada and the largest capital investment in the history of Atlantic Canada. And it could pro-

vide Newfoundland, which has the highest unemployment rate in Canada and the lowest per capita income, with an unaccustomed taste of prosperity. Government economists estimate that the project will directly create at least 2,500 jobs in Newfoundland, where the unemployment rate is 17.2 per cent compared with a national average of 7.8 per cent. And the indirect economic impact of the

project will go far beyond that. Moreover, although Newfoundland is providing tax and royalty breaks to get the project going, the provincial government estimates that it will still earn a minimum of $2.6 billion from the project if oil prices hit $24 per barrel by the time production starts in 1995. Said Craig Dobbin, chairman of Canadian Helicopter Corp. of St. John’s: “This is the biggest thing to happen to Newfoundland since we joined Confederation.”

The historic deal was only made possible by some critical last-minute financial concessions by Peckford’s old rival, the federal government. Ottawa had to provide a $3.2-billion support package—in the form of grants, loans and loan guarantees—before the fivecompany oil consortium would commit

itself to the project. And that brought heavy criticism from political opponents and spokesmen for the Alberta oil industry, who charged that the government payout is a blatant vote-getting ploy by Peckford and Prime Minister Brian Mulroney—both of whom are expected to call elections later this year. Indeed, federal government officials said last week that a new agreement is being negotiated to help with a

$4-billion oil sands project near Fort McMurray, Alta. And several other megaprojects in Alberta and the Canadian North are also lining up for aid. Asked Calgary-based oil analyst Ian Doig, editor of the industry newsletter Doig’s Digest “If the government is willing to spend $3 billion for seven seats in Newfoundland, just how much are they willing to spend for 21 seats in Alberta?” But the federal government says that regional development is a primary reason for the energy payouts.

Last week’s agreement has paved the way for the development of what is potentially Canada’s biggest oilfield. Hibernia’s oil reserves are estimated at 525 million to 650 million barrels—or equal to about 11 per cent to 13 per cent of the total reserves of

Western Canada. But a combination of low oil prices and jurisdictional disputes between Ottawa and Newfoundland has kept the project on the back burner since the field’s discovery in 1979.

However, in March, the companies— Mobil Oil Canada Ltd., Gulf Canada Resources Ltd., Petro-Canada, Chevron Canada Resources Ltd. and Columbia Gas Development of Canada Ltd.— were seriously considering an offer by Ottawa and Newfoundland based on an estimated cost of $4.1 billion for preproduction development of the field. But, in May, Mobil told federal negotiators that preproduction costs would actually total $5.2 billion—and asked Ottawa to pay more.

Overall, Ottawa has agreed to a grant of $1.04 billion designed to cover up to 25 per cent of the development costs and a $1.66-billion loan guarantee for the construction phase. And, if needed, it will also provide up to $175 million in temporary loans for construction cost overruns and a maximum of $300 million in loans to help the consortium meet interest payments if oil prices fall below $30 per barrel once production begins. In addition, the Newfoundland government agreed to forgo most sales tax for the project’s capital and operating costs and to take lower production royalties of one per cent initially, increasing to five per cent over several years. Ottawa, meanwhile, will get 10 per cent of net revenues after the oil companies recoup their investment. Said Richard Carl, a senior vice-president of the brokerage firm Merrill Lynch Canada Inc.: “This agreement is a role reversal between the industry and government. The governments have agreed to take on more risk but they wanted compensation in return.”

But oil prices will have to be far higher than they are now for Hibernia to be economic. Trend-setting West Texas crude was selling for $18.50 a barrel last week. Indeed, Chevron officials say that the company will not make money unless prices are above $24 a barrel. But federal officials say that the loan will be paid back as long as the price of oil remains above $15 during production.

Developing Hibernia, which sits under 250 feet of water on the fish-rich Grand Banks, will be an immense engineering challenge. The centrepiece of the project will be a 470,000-ton artificial, concrete island that sits on the ocean floor and extends above sea level. The platform is designed to provide a stable base for drilling and production and to store up to 1.45 million barrels of oil even if struck by one of the icebergs commonly found in the North Atlantic. When scheduled production begins in 1995, tentacle-like flow lines will carry the oil to the huge platform from the 65 to 80 satellite

drilling wells on the field. And the oil will be loaded into strengthened tankers, which will be able to deliver up to 150,000 barrels a day to refineries.

Before work can begin, Ottawa and the consortium must reach a legally binding agreement with a deadline of next March. But for now, Newfoundlanders are gleefully waiting for the oil boom to hit. Overall, the six-year construction phase is expected to directly employ between 1,400 and 2,000 Newfoundlanders. And another 1,100 jobs will be directly created once the 18-year production period begins. St. John’s will be the white-collar centre for the project and will also see demand for engineering, fabrication and other services grow. And the good economic news will also spread across the province into such places as Come By

Chance, where the huge Hibernia platform will be assembled. Meanwhile, the Marystown shipyard will likely be busy building support vessels and performing repair work. As well, the production facilities and skills developed to take advantage of Hibernia will leave the province in good shape to benefit if some of the other fields near Hibernia are developed. Said Harold Barrett, Newfoundland’s minister of development: “We will still be feeling the benefits long after the life expectancy of Hibernia.” And an oil boom could also single-handedly reverse the steady exodus of Newfoundlanders to other parts of the country in search of jobs. In addition, the Hibernia agreement could also mark a turning point in relations between Newfoundland and the federal government, which have been soured by the province’s failure to renegotiate the terms of a 1969 agreement with Quebec on Churchill Falls hydroelectric power. The contract, signed by Newfoundland Premier Joey Smallwood, allowed HydroQuébec to buy most of the electricity generated at the massive Churchill Falls development at fixed prices for 65 years—despite increases in the rate of inflation and fluctuating energy prices. When energy prices soared in the 1970s, Hydro-Québec began reaping large profits from Churchill Falls when it resold Labrador power to American buyers.

The Mulroney government helped improve relations by signing the Atlantic Accord in 1985, which gave Newfoundland a measure of control over its offshore resources. Now, it also hopes the Hibernia deal will serve to repair the damage of past decisions. But it may take more than that to allay the bitterness over the Churchill Falls affair. As Gordon Winter, 75, who was Newfoundland’s first finance minister after it joined Confederation, put it, “We are a very Irish province, and Irish people never forget if they are wronged.” Newfoundlanders, it seems, have had their hopes for wealth dashed too many times to be easily placated.