East Coast defies trend
Major companies continue offshore exploration and production
Major oil companies have been jettisoning projects, slashing capital expenditure and scrapping ambitious plans across the world due to the decline in oil prices from more than $100 US per barrel of West Texas Intermediate crude in June 2014 to less than $30 US at one point in mid-January.
Canada’s traditional energy patch has not been spared. Indeed, the oilsands has perhaps been hurt most of all, given the high cost of extracting and refining. But there is still one place in Canada that is defying the odds, where development continues and hopes for a brighter future remain high — the East Coast.
Despite the rout in oil prices, Royal Dutch Shell PLC, Exxon Mobil Corp., BP PLC and Husky Energy Inc. are persevering with plans for exploration activities in the Atlantic Ocean, and not just in favoured Newfoundland and Labrador but also off the shore of Nova Scotia.
The hulking Exxon-Mobil-operated Hebron development is going up 350 kilometres southeast of St. John’s, while Royal Dutch Shell’s drill ship is patrolling the Shelburne Basin 250 kilometres south of Halifax. In the Flemish Pass Basin, partners Husky Energy Inc. and Statoil ASA are hard at work in the Bay du Nord, hoping to repeat their stunning discoveries in the area during the past few years.
At the height of the oil price downturn last November, companies such as Chevron Corp. and Statoil ASA forked out just over $1.2 billion in work commitments for seven parcels offered by the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB).
“Newfoundland and Labrador offshore is one of the last great undeveloped frontiers left in the world,” said Ed Martin, chief executive of Nalcor Energy, the province’s energy corporation. The spate of renewable and hydrocarbons project would see Nalcor’s net income grow more than tenfold to as much as $500 million “in just a few short years,” according to the company.
The oil majors’ pursuit of East Coast licences comes in sharp contrast to their hasty retreat in comparable jurisdictions, such as offshore West Africa, the North Sea and Western Canada, where a number of conventional and oilsands projects have been shelved.
The East Coast has largely ducked the great retreat from offshore activities globally, thanks to expensive long-term contracts sealed during the heady days of $100 US oil.
“We are probably on the verge of renaissance in exploration,” said Robert Cadigan, president of Newfound land Labrador Oil & Gas Industries Association.
The big prize for oil companies is the projected 12 billion barrels of crude oil off Newfoundland, as well another eight billion barrels of oil or so off Nova Scotia, according to the provinces’ estimates.
“We only have five per cent of our massive offshore area under licence at this point,” Martin said. “We have got an area of deepwater that’s 50-per-cent larger than the Gulf of Mexico,” which boasts reserves of around 4.7 billion barrels.
Norway-based Statoil was a partner in five of the seven bids in November and also clinched a solo bid worth $423 million. Its curiosity is clearly piqued by its trio of mega discoveries in the Bay du Nord, 500 kilometres northeast of St. John’s.
Oil companies have had an on-again/off-again relationship with the East Coast, but Nalcor embarked on an extensive datagathering program a few years ago to keep its romance alive with oil majors.
The 2-D seismic data it collected, from an area spanning 110,000 kilometres from the tip of Labrador, bordering Greenland, right down to the Flemish basin area, certainly yielded early results.
“What’s been discovered through that (program) are three new basins in Labrador that we didn’t know existed,” Cadigan said.
Despite the enthusiasm, there are signs that the world of $40 US oil may finally be catching up with the Atlantic, but it’s not had nearly the impact it’s had in other areas.
“The dip in activity in the East Coast hasn’t been the same as you see elsewhere in West Africa and the North Sea,” said Luke Davis, a London-based analyst at Infield Systems, although he adds that exploration activity is also a fraction of the more established and busier offshore sites.
One reason for the lag in activity, Davis said, is that the East Coast is a high-cost region, and is subject to the same stresses as everywhere else.
“There are additional problems with Canada, and one of them relates to the requirements for flow testing on new discoveries which increases the cost of exploration …” he said.
Freezing temperatures and volatile weather could also keep oil companies at bay, especially since Shell’s retreat from the Alaska coast last year shows oil companies have yet to master more inhospitable conditions.
Already, Shell’s $1-billion offshore exploration program in the Shelburne Basin has been put on temporary hold after a piece of equipment from its drill ship broke due to severe weather conditions. An investigation is underway and drilling operations will remain suspended while repairs are carried out.
The setback is more fuel for the rising opposition to offshore and inland drilling activities in the Atlantic, and may deter more exploration at a time when an ecological disaster could spell doom for the entire basin.
BP, which is familiar with offshore setbacks, could miss its first- quarter deadline to announce the location of its first well in the Scotian Basin, which is expected to commence in 2017. The company did not respond to request for comment.
Husky has also deferred a final investment decision on the White Rose Extension Project.
“We are seeing some delays offshore when it comes to some of the field work that was contemplated,” said Paul Barnes, Atlantic Canada manager at the Canadian Association of Petroleum Producers. “Our fear is, of course, if that downturn is sustained beyond this year, that would certainly impact offshore exploration activity.”
Nevertheless, existing plans have not been scrapped. Husky drilled two new wells at the South White Rose Extension last year and plans to spend up to $500 million this year. And the company is in the midst of an exploration and appraisal program at the Bay du Nord discovery area with partner Statoil.
Husky signed a two-year contract last December to secure the Henry Goodrich rig, starting from mid-2016, for ongoing development drilling at the South White Rose Extension and North Amethyst field.
The most promising development is the Exxon Mobil-operated Hebron project in the Jeanne d’Arc Basin, set to commence operations in 2017. Speculation persists that the development may be delayed, but Nalcor, which has a stake in the project, believes Exxon will stick to the deadline.
Hebron is an engineering marvel, rising 165 metres from the sea floor and comes complete with a “metal hotel” featuring gymnasiums, music rooms and living space for the 220 personnel on board. It will yield 150,000 barrels a day from a field containing 700 million barrels, which will then likely head to continental Europe.
The project should also boost Newfoundland’s annual offshore production, which has steadily declined over the past decade, falling to 62.6 million barrels last year from its peak of 134 million barrels in 2007, according to the offshore regulator C-NLOPB.
Key producing fields such as Hibernia, led by Exxon Mobil, Terra Nova, spearheaded by Suncor Energy Inc., and the White Rose and North Amethyst oilfields, majority- owned by Husky, all suffered declines.
Nalcor’s Martin believes that the launch of predictable annual licensing programs and seismic data “packaged with a bow” should keep production declines in check over the long run.
Other pieces of the Atlantic’s slow march towards greater fossil fuel development also continues at a mixed pace.
Pierdae Energy Ltd. and Bear Head LNG Ltd. have secured most of the necessary Canadian and U.S. permits to build their LNG projects in Nova Scotia. Spain’s Repsol SA is mulling an export facility to its LNG import facility in Saint John, N.B., and India’s Hiranandani Group is planning an export terminal north of Halifax.
Meanwhile, TransCanada Corp.’s $12-billion Energy East pipeline, which is supposed to take Alberta crude oil to exports markets via a $ 300- million marine terminal in Irving Oil’s Canaport facility in Saint John, remains in the midst of intense public and regulatory scrutiny.
The spate of would-be projects means the high-cost and largely untapped Canadian Atlantic will not be forgotten, although the region needs oil prices of around $45-60 US per barrel to remain attractive.
But the Atlantic may not be immune if oil prices linger around the $40 US range for the long run.
“Companies will likely cut down exploration, which will be unfortunate because if you are not exploring, you are not getting to the next discovery,” Barnes said. “If this downturn is sustained for a greater length of time, that will see more of an impact in the offshore.”
We only have five percent of our massive offshore area under licence at this point. We have got an area of deep water that’s 50 percent larger than the Gulf of Mexico.
ED MARTIN
PRESIDENT AND CEO OF NALCOR ENERGY