The energy sector has not delivered on its promises

STEVE MAICH September 6 2004


The energy sector has not delivered on its promises

STEVE MAICH September 6 2004



The energy sector has not delivered on its promises


IT’S A WARM Thursday afternoon in August, and about 75 people have crowded into a community hall in Port Hawkesbury, just across the causeway separating Cape Breton Island from mainland Nova Scotia. The sign outside says “Ceilidh Tonight,” but the musicians won’t arrive for hours yet. This crowd has come to hear Premier John Hamm preach a familiar gospel of oil and gas salvation.

Hamm is here to announce that Texas energy giant Anadarko Petroleum Corp. has acquired a small Canadian company planning to build an up to $500-million liquefied natural gas plant at nearby Point Tupper. “With the right effort, and the right leadership, the energy sector will grow—creating more jobs and opportunities for Nova Scotians at home,” the premier enthuses. “And a more attractive location for investment, for potential partners around the world.”

According to Nova Scotia’s government, this is the latest in a long line of successes for the province’s burgeoning energy sector. But this plant is being built to import gas from Africa and the Middle East and to distribute it primarily to the U.S. northeast. The province will collect no royalties, and after construction the facility will employ 40 people at the most. The real heart of Nova Scotia’s energy industry is its offshore gas fields, and they have provided few reasons to celebrate lately. On the very day of Hamm’s enthusiastic announcement, ExxonMobil Corp. quietly abandoned another exploration well, called Cree, in the waters off Nova Scotia’s eastern shore. And two weeks later came a more serious blow, as Marathon Oil abandoned its highly anticipated Crimson deepwater well after failing to find sufficient quantities of gas.

But Nova Scotians are getting used to such

disappointments. Dry wells, expired exploration licenses and plummeting gas reserves have been the story of Nova Scotia’s energy industry of late. It’s been almost five years since the Sable Offshore Energy Program started pumping gas from beneath the ocean floor, and it remains the only producing well in Nova Scotian waters. More than four years have passed since the last significant gas discovery, as more than a dozen wells have come up dry. After three decades of intense hype and predictions of economic rebirth, Nova Scotians and industry observers have come to doubt that the energy sector will ever live up to its billing.

Ian Doig has worked in the energy industry for more than four decades as a lobbyist and independent analyst. He says Nova Scotia’s leaders need to own up to the sobering reality unfolding in the province’s waters. “There is no other offshore basin in the

world that has such a dismal drilling record and still has people running around saying it’s world class,” says Doig. “Somebody has to sit down, take a cold shower and do some sobering up, because with each dry hole you’re seeing the tide going out on the Nova Scotia offshore.”

JOHN HAMM is not the first Nova Scotia politician to score points assuring constituents that a brighter day of gas-fuelled wealth is just around the corner. It’s been a common theme with successive provincial governments dating back to October 1971, when then-premier Gerald Regan heralded Mobil Oil’s historic discovery near Sable Island, off the province’s eastern shore. Regan held up a small test tube of oil and declared it “might well be the future prosperity of Nova Scotia.” The next day’s Halifax Chronicle-Herald carried a screaming 10-cm headline across the top of the front page: “IT’S OIL.” Prosperity, however, would be

slow in coming.

There were sporadic discoveries of gas and oil through the 1970s as the industry continued to test and evaluate the region’s potential. The biggest came in

1979, when Mobil discovered gas in the Venture field near Sable Island. Like Regan before him, Tory premier John Buchanan spent much of the 1980s talking about the enormous benefits that would soon flow to the province. As if to underscore that confidence, the province unleashed a rush of spending aimed at fostering development of the industry. That spending has left Nova Scotia dotted with ill-fated public works projects, from a virtually untouched industrial park in Melford, created to house an oil refinery that was never built, to Riverview Consolidated School in the tiny outport of New Harbour, built in the 1970s for a rush of settlement that never materialized. The school was built to accommodate 400 students, but last year it had just 17.

Perhaps the most infamous example is Highway 374 connecting tiny Sheet Harbour on the eastern shore with New Glasgow, about 85 km to the north. The Buchanan government used an offshore development fund to build the road in the 1980s on the basis that Sheet Harbour would soon be a key supply depot for drilling rigs. But in 1987, falling natural gas prices put the Venture field on hold. It wouldn’t be revived until 12

years later, as part of the Sable project. Sheet Harbour never became the supply hub that was expected, and Nova Scotians ruefully call Highway 374 the “road to nowhere.”

Larry Hughes has watched it all unfold with a mixture of frustration and sadness. The professor in the electrical and computer engineering department at Dalhousie University has gained local prominence as one of the most ardent critics of the government’s record in the energy business. “I’m not say-

ing Nova Scotians are a cynical bunch, but they’ve been led down this path so many times,” he says. “There are always the promises of a brighter tomorrow, but nothing ever seems to come of it.”

THE SABLE Offshore Energy Program was supposed to change all that. It’s named for Sable Island, a sandy crescent of land about 300 km southeast of Halifax that has long been known as the Graveyard of the Atlantic because of its many shipwrecks. Sable became synonymous with natural gas in the 1990s when energy giants ExxonMobil and Shell Canada decided to pool six separate fields in the area into a single co-owned megaproject. As it neared com-

pletion, politicians and pundits could barely contain their enthusiasm. “Not since fish stocks were rich enough to almost stop a ship in its tracks has the offshore held so much economic promise for Nova Scotia,” one local paper blared in July 1999.

Energy analysts and economists got swept up too.

Ever since 1983, the official estimate held that about 18 trillion cubic feet of gas is contained under the shallower waters of the Scotian shelf, based on seismic testing by the Geological Survey of Canada. In 2002, the Canada-Nova Scotia Offshore Petroleum Board said that double that amount could be found if you included what may be below the deeper waters of the Scotian slope. Calgary-based energy consulting firm Ziff Energy Group then raised the ante again, calling current estimates for the Scotian shelf “conservative,” and saying there could be 50 trillion cubic feet of gas in Nova Scotia’s shallow waters alone. To put all of these numbers in perspective, one trillion cubic feet of gas is enough to heat about one

million homes for five years. “Development of this emerging supply basin will aggressively continue throughout this decade,” Ziff predicted.

That same year, the Conference Board of Canada produced a study predicting an economic bonanza for the province. The report projected that by 2020 Nova Scotia could have an unemployment rate of 4.5 per cent, the second lowest in the country behind energy-rich Alberta. It projected

a $6.2-billion rise in the province’s gross domestic product, and an 81-per-cent rise in personal disposable income, fu-

elling an $869-million surge in retail sales. Just two years later, Hughes says, it appears those projections were “wildly optimistic.”

By the end of 2002, the energy industry was getting worried. Two years had passed since EnCana hit gas in Deep Panuke, less than 50 km west of the Sable project, and there had been no major finds since. The failed wells were piling up—Queensland, Musquodoboit, Onondaga, Marquis—each drilled in shallow water, within about 100 km

WHILE some blame a run of bad luck, many in the industry have a darker outlook: there isn’t as much gas as predicted

of Sable, at an estimated cost of $30 million to $100 million. Through 2003 and 2004, the news kept getting worse, culminating last December with EnCana’s decision to suspend development of Deep Panuke.

While some say it’s nothing more than an extended run of bad luck, many in the industry have a darker outlook: there just isn’t as much gas as some believed. “What the drilling has done is prove the fallacy of the resource estimates that had been touted since the

1990s,” Doig says. “The figures were seriously out of whack.”

Nova Scotia’s one producing energy project, meanwhile, has

had its own problems. When Sable was first envisioned, ExxonMobil and Shell Canada estimated reserves of 3.6 trillion cubic feet. That number has been twice scaled back, and in January of this year Shell reduced its reserve estimate for the Sable project to about 1.3 trillion cubic feet, roughly one third of the original estimate. As a result, a project that was expected to produce for 25 years could be exhausted in as little as 10 years from now. “The only thing saving Sable from being a complete disaster is the rise in commodity prices,” Doig says. “If gas prices were US$2 [per 1,000 cubic feet], where most expected them to be, this thing would be dead in the water.”

Slowing production levels at Sable have also cut into the royalties paid to the province. Through the first four years of the project, Nova Scotia collected just $38 million in royalty revenues. And in this year’s budget,

the government trimmed its royalty forecast for the next two years as well. “It’s a pittance compared to what was promised and what was expected,” Hughes says.

And there are signs the industry has lost patience with the costly drilling failures. In July, several companies allowed 13 exploration licences to lapse. In December, another 10 permits are due to expire. This summer, the Canadian Association of Petroleum Producers closed its Halifax office, saying expected

drilling activity in the region didn’t justify keeping it open.

Through it all, Nova Scotia’s energy minister, Cecil Clarke, remains upbeat. “What we’re seeing is the normal ebb and flow of the energy business,” he says. “The thing about expiring exploratory licences is, it’s a business decision.

But none of the companies have said they’re pulling up stakes and walking away. We, as a government, have to be prepared to ride this wave. Last year was a year for taking stock—a reality check. But you always have to be optimistic in this business. You don’t want to cast a pall over the industry.”

SOMEWHERE between the government’s unsinkable optimism and Ian Doig’s incessant fatalism

stands Gordon MacDonald. As special projects manager for the Regional Development Authority of Guysborough County, his primary responsibility since 1995 has been to help foster growth of the energy industry and attract jobs to the rural region that stands closest to the offshore fields of the Scotian Shelf. Guysborough is really the epicentre of energy development, because it is where the pipeline from the Sable project comes ashore, and is home to the Goldboro gas plant, where natural gas is processed into marketable gas.

MacDonald was born and raised in Guysborough County, and he knows there is an enormous amount riding on the success of the rigs. Nowhere are the stakes more apparent than here. In 2001, the county’s unemployment rate was 23 per cent, and between 1996 and 2001 its population fell by 10 per cent. In the three years since, things have gotten worse, MacDonald says, as the fishery has continued to decline, and the forestry industry employs fewer people.

When gas first began to flow from the Sable project in 1999, he told a local newspaper that he felt as if he’d “died and gone to heaven.” Almost five years later, MacDonald is still hopeful, but more philosophical about the industry’s prospects. “If you told me nine years ago that all this time would go by and we still wouldn’t have a second project producing gas, I wouldn’t have believed it,” he says. “But I’ve learned that 10 years isn’t a long time in this business.”

MacDonald agrees that expectations were set too high, though. Energy companies can drill wells on land in western

Canada at a fraction of the cost of drilling in the offshore of Nova Scotia, he says, and this long dry spell makes the whole industry nervous. “We know the easy wells are tapped. Everything else that’s out there is in the deep water and that means the wells will cost anywhere from $75 million to $90 million a pop,” he says. “That is not for the faint of heart, and companies aren’t going to rush into it. But there’s a herd mentality to this business. And all it takes is one good discovery and everybody’s going to be back in the pool.”

After ExxonMobil abandoned the Cree well, the industry’s hopes for that “next good discovery” were focused on Marathon Oil’s Crimson well in the Annapolis Block. There was hopeful talk that a successful find there could begin a domino effect and break the logjam that has stymied the industry

for four years. If Crimson had been a success, it may have encouraged EnCana to proceed with Deep Panuke. And that, in turn, could have led to an expansion of the Maritimes & Northeast Pipeline connecting Nova Scotia to the U.S. market, meaning hundreds more jobs and a renewed interest in exploration. Suddenly, all those rosy projections wouldn’t seem so far-fetched. But those hopes crumbled last week with news of Crimson’s failure.

The industry’s proponents aren’t giving up. MacDonald admits he gets his hopes up on every major drilling program,

and his hopes were higher than usual on Crimson. But despite all the setbacks, he says he’ll keep working. Bass Enterprises Production Co., the private exploration company owned by Texas’s wealthy Bass clan, recently revealed its intention to drill up to three new wells in Nova Scotia waters, and that tells you something about the promise of the industry. “As long as Nova Scotia is situated as close as we are to the northeastern U.S., and its insatiable demand for energy, there will be interest here,” MacDonald says. “It doesn’t matter if the next 10 wells are dry, there will always be people willing to drill $90-million gas wells here.” As long as there is drilling, there is hope, but he knows the other side of that coin too. Until there is a major find—or, better yet, several major finds—hope and promises may be all there is to hold on to.