Exxon Mobil Corp. is giving the green light to its $14-billion (U.S.) project to pump oil from the massive Hebron oil field off Canada's East Coast, which will launch a major new source of production for Canada later this decade – and a new wave of resource revenue for Newfoundland and Labrador.
The announcement marks the formal end of a feud which former premier Danny Williams escalated in 2006, when he demanded the province receive a 4.9-per-cent stake in the project. Newfoundland eventually got its way, but further sparring followed over benefits such as whether all of the platform would be built in the province, thus creating jobs on the East Coast.
However, the dispute was settled in October when the U.S. company agreed to build much of the platform in the province, and offered Newfoundland $150-million to offset the portion that will be built elsewhere.
Newfoundland has been posting surpluses in recent years, and the new project is expected to add another $23-billion to the government's treasury over the next 30 years from royalties, taxes, and the province's ownership stake in Hebron. Oil production is slated to begin in 2017, and the platform is designed to produce 150,000 barrels of oil a day out of the ocean floor, Exxon said Friday.
The Hebron field is located about 350 kilometres southeast of St. John's, and is the province's second-largest oil discovery after Hibernia.
The Hebron consortium, led by Exxon, will drill for oil in 95 metres of water.
The province's offshore royalties slipped last year, highlighting the importance of fresh energy efforts like Hebron. For Newfoundland, which was deemed to be a "have" province in 2008, Exxon's pledge helps secure its financial future, assuming oil prices stay strong.
"This promises a continuation of the receipt of the royalties as opposed to projects winding down because they do have a life cycle," Judith Dwarkin, chief economist and director of research at ITG Investment Research in Calgary, said.
"You have to develop new reserves in order to sustain production."
Newfoundland's offshore royalties are expected to total $2.2-billion in 2012-2013, compared to $2.8-billion in 2011-2013. But while Ms. Dwarkin calls Hebron's financial benefits "huge" in the context of the government's current financial situation, her enthusiasm comes with caveats. Royalties will be lumpy as the project ramps up, and volatile oil prices could render the province's estimate moot – a harsh reality biting Alberta's government, which has signalled it is headed for a deficit for the upcoming fiscal year.
At its peak, 3,500 people will work on the project, which will put further pressure on the Western Canadian labour crunch as workers from the East Coast who have been populating oil sands camps return home for employment.
Carving up the benefits flowing from the extraction of natural resources is a touchy issue in Canada's provinces. Alberta raised royalty rates a few years ago, just as natural gas prices plummeted. This diminished the oil patch's regard for the provincial government, which later returned to a structure similar to the original royalty framework.
British Columbia sparked anger in Alberta when it announced it wants a slice of the benefits should Enbridge Inc.'s proposed Northern Gateway oil sands pipeline snake through its territory. Newfoundland has stood its ground against oil companies, pressuring them for more cash and promises of jobs.
"Our goal has been to ensure that Newfoundlanders and Labradorians are the main benefactors with respect to our natural resources, and that the development of Hebron maximizes benefits for the people of the province," Premier Kathy Dunderdale said in a statement Friday. "Hebron will support jobs, the economy and strengthens our province's position as an energy warehouse."
Newfoundland called Exxon's decision to proceed with the project "great news."
Exxon also pointed out how Hebron would bolster the province's coffers. "Hebron's development will provide significant benefits to the province, including employment for up to 3,500 people during construction in the province, and royalties and taxes to fund provincial infrastructure, social programs and services," its statement said.
The company and government estimate they can extract 700 million barrels of oil from the offshore field, and do so safely.
"Exxon Mobil will employ its expertise in Arctic development and project execution to develop this world-class resource in challenging operating conditions," Neil Duffin, president of Exxon Mobil Development Co., said in a statement.
The project has already been approved by the federal and provincial governments.
Exxon's Hebron partners are Chevron Corp., Calgary's Suncor Energy Inc., Norway's Statoil ASA, and Nalcor Energy, which is owned by Newfoundland and Labrador.
Norway's government-controlled oil company also highlighted how the project will keep Newfoundland financially healthy in years to come.
"Hebron is an important project for Statoil and for Newfoundland and Labrador," said Atle Aadland, Statoil's vice-president of the company's Canadian offshore division. "It is economically strong and it will contribute significantly to Statoil's production for years to come."