BUSINESS

Lining up for oil aid

JOHN HOWSE August 8 1988
BUSINESS

Lining up for oil aid

JOHN HOWSE August 8 1988

Lining up for oil aid

Hard on the heels of Ottawa’s agreement to provide $3.2 billion to develop the Hibernia oilfield off the coast of Newfoundland, western oilmen and senior government officials reacted last week. They met in Edmonton to scrutinize details of what will likely be Western Canada’s first new energy megaproject in a decade. Ottawa now wants to push forward with financial aid to hasten development of the OSLO project, a $4-billion plan devised in 1981 to extract 75,000 barrels of crude daily by 1995 from the oil-soaked sands that surround Syncrude Canada Ltd.’s Fort McMurray, Alta., plant. Said Alberta Energy Minister Neil Webber: “OSLO has the

momentum.”

The OSLO project, named after the Other Six Leases Operation (Syncrude Canada Ltd. held two of the original eight leases), would be a major step toward developing Northern Alberta’s vast oil sands, which contain billions of barrels of oil and remain the province’s economic ace in the hole. But instead of a hastily announced deal to balance the Hibernia agreement, senior federal energy officials last week cautioned against expecting a quick decision. Said Ronald Erdmann, director general in the financial and market analysis branch of the federal energy department: “Any deal is unlikely for several months.” But even that sobering note was not enough to dampen the enthusiasm of promoters of other energy megaprojects in Alberta and the Arctic who are already lining up for the next round of subsidies and loans from the federal government.

Federal Energy Minister Marcel Masse has said that each project will be weighed on its own merits. But many industry insiders say that the federal government’s decision to finance development of the Hibernia field has set a precedent for government support for other megaprojects. Declared Glen Russell, Gulf Canada Resources Ltd.’s vice-president for major projects: “The industry has been wondering whether the appropriate arrangements could be made to develop a project of the magnitude of Hibernia. This helps answer a lot of the questions.” Still, the ultimate fate of any new energy development will depend largely on rising oil prices rather than government payouts. Participants in the Hibernia oilfield, the federal government’s biggest energy investment, say that they will not make money unless prices are above $24 a barrel when production starts in 1995. Last week, oil was selling for just $18 a barrel.

Ottawa and the OSLO consortium— which includes Esso Resources Canada Ltd., Canadian Occidental Petroleum Ltd., Gulf Canada Resources Ltd., Petro-Canada Inc., PanCanadian Petroleum Ltd. and the Alberta government—are also gambling that oil prices will rise. But many oil analysts say that the OSLO project, with reserves equivalent to about 10 billion barrels of light crude, makes far great-

er economic sense than Hibernia, which may hold only 600 million barrels of oil. Officials with OSLO participants say that they will be able to equal the nearby Syncrude plant’s low operating costs, which allow the oil giant to extract a barrel of oil for less than $15. And OSLO’S mining and petrochemical technology is well proven — unlike the challenges posed by Hibernia’s location, 200 miles southeast of St. John’s in a region ominously known as “Iceberg Alley.” Said Esso Resources spokesman Miles Shaw: “OSLO is a strong project.”

Even so, OSLO’S newfound momentum results in part from the fact that the project will provide massive support for Alberta’s sagging energybased economy. Political opponents say that the federal Tories—who are expected to call an election this yearare more interested in creating jobs and winning votes than making sound energy decisions. The OSLO project, once in the construction stage, would provide up to 6,000 jobs and would add 2,800 full-time positions when oil begins flowing. That compares favorably with Hibernia, which is expected to directly employ between 1,400 and 2,000 people during the six-year construction phase and another 1,100 once the 18year production period begins.

The OSLO negotiations involve a stillsecret and complex financial package arranged after several months of strenuous federal and provincial government negotiations. Grants, loan guarantees and royalties—the cornerstones of the Hibernia agreement—are all part of the discussions. Members of the consortium last week were sifting through the package. And provincial government officials expect OSLO’S response later this month. But the arrangement is unlikely to match Ottawa’s generosity in the Hibernia project. Anxious to help Canada’s poorest province, the federal government was forced to provide a $3.2-billion support package in the form of grants, loans and loan guarantees before the oil companies would commit themselves to developing the offshore oilfield. In addition, the Newfoundland government had to give tax breaks and agree to accept lower production royalties.

Now that the OSLO negotiations are nearing completion, a number of other megaprojects are also pressing for government aid. Near the top of the list is Husky Oil Ltd.’s proposed heavyoil upgrader project at Lloydminster, on the Alberta-Saskatchewan border. The $1.27-billion project, which has been on the negotiating table for four years, has stalled because Husky has been unable to line up industry partners. Also seeking funding is Syncrude, which is planning a $4-billion expansion at its Fort McMurray plant. Meanwhile, Suncor Inc. is looking for cash to finance a $2-billion expansion at its Fort McMurray oil sands plant. And the Hibernia settlement has also cleared the way for new negotiations over Gulf Canada’s plans to bring oil out of the Beaufort Sea. With an election looming, the oil companies want to be first in line in case Ottawa decides that developing another megaproject is a political priority.

-JOHN HOWSE in Calgary