$2.2B OIL PROJECT A GO IN THE EAST

Husky Energy makes deal with ‘motivated’ Newfoundland, writes Claudia Cattaneo.

Husky Energy Inc. gave the thumbs up Monday to the next big project in Newfoundland and Labrador’s offshore, showing the era of oil megaprojects is far from over — particularly where they are still popular.

In an interview Monday, Husky president and CEO Rob Peabody said the attractiveness of the $2.2-billion West White Rose Project improved thanks to cost savings that boosted returns and “very constructive negotiations” with a motivated provincial government.

“There were some minor issues that could have increased the risk of execution and we just found common ground,” Peabody said. “So they still got the jobs, and we still got a project that would meet our return hurdles” — a 10 per cent return at US$45 a barrel oil.

Notably, the project is not in Western Canada, where unsupportive governments, opposition from environmentalists and aboriginals, pipeline bottlenecks and higher costs have made investment decisions tough.

“Newfoundland and Labrador has positioned itself at the forefront of the global oil and gas industry,” Premier Dwight Ball said in a statement. “The West White Rose Project is the largest oil and gas production project to move forward in Canada this year.”

West White Rose was shelved after oil prices collapsed in 2014, hammering provincial finances. Since then, Husky made changes that improved capital efficiency by 30 per cent, raised peak production by 40 per cent to 75,000 barrels a day, and nearly doubled initial reserves of 230 million barrels.

First oil is expected in 2022 and peak production is expected by 2025. The company, which owns 70 per cent of the project, and partners Suncor Energy Inc. and Nalcor Energy, will use a fixed wellhead platform tied back to the SeaRose floating production, storage and offloading (FPSO) vessel to process and export oil.

Large oil projects are seen by many as a thing of the past due to long construction timelines and oil price volatility, a combination that favours production that can be ramped up and monetized quickly, such as U.S. shale.

“I think the world is still going to need some offshore oil,” Peabody said. “This project is a bit unique for being a step out from an existing project and using a lot of the existing infrastructure we have in the region.

“There aren’t that many projects that earn a 10 per cent rate of return at US$45-a-barrel oil.”

Husky wouldn’t say how the province helped improve the project’s attractiveness.

Ball said construction would start in Argentia, N.L., this year, employ up to 700 people and provide more than $3 billion in royalties, equity and taxes. Once in operation, the platform will have a staff of 250.

Paul Barnes, manager for Atlantic Canada for the Canadian Association for Petroleum Producers, said West White Rose is the only project moving ahead in the region and will help keep the oil production and construction industries alive.

The latest megaproject, the $14-billion Hebron led by Exxon Mobil Corp., is nearing completion and expected to start producing oil at the end of the year.

No decisions have been made about commercializing recent discoveries in the Flemish Pass, Barnes said.

The provincial government is “certainly recognizing that there is a competitiveness aspect to a lot of things that are happening worldwide these days, especially in the U.S., and that in order for these projects to go ahead they have to set the right business conditions and this project is trying to do exactly that,” Barnes said.

The completion of Hebron created an opening for Husky to move head with West White Rose, Peabody said.

“A lot of the people who were working on Hebron are exactly the type of people we need,” he said.

The Newfoundland and Labrador Oil & Gas Industries Association said Husky’s decision “is exactly what we need right now in Newfoundland and Labrador to bridge the gap to the developments we know are in our future.”

White Rose is one of several major oil discoveries made in Newfoundland’s offshore in the past half century.

The main White Rose field was found in 1984. It’s about 350 kilometres east of St. John’s. Commercial oil production began in November 2005. Husky has been one of the region’s stalwarts and now produces about 40,000 barrels a day out of total production of 320,000.

The company, which is holding its annual investor day Tuesday in Toronto, also announced Tuesday a new oil discovery at Northwest White Rose.

I think the world is still going to need some offshore oil. ROB PEABODY, CEO and president, Husky Energy Inc.