Tuesday, June 26, 2012

WELCOME TO REALITY: NON-RENEWABLE RESOURCE DEPENDENCY

 Residents of Mortier Bay are getting a view of one of Newfoundland and Labrador's most significant revenue generators today.

Suncor's  269-metre Terra Nova FPSO has arrived at the Kiewit Offshore Services facility in Cow Head. That is good news for employees of the shipyard, but not so great news for public sector employees. (at least not in the short term)


The FPSO will undergo maintenance scheduled to take at least two months. Work at the FPSO began to wind down on June 8th. The vessel disconnected over the weekend and headed west to Mortier Bay. There will be no oil production for approximately 21 weeks.


While Kiewit Offshore Services employees are busy doing repairs, upgrades and maintenance, the company will execute a significant subsea program replacing  infrastructure on the ocean floor.


This summer, two of the NL offshore wells will be idle. Husky Oil's White Rose FPSO is in Belfast Ireland for maintenance. Both are expected to be back on line by late summer/early fall.


This is the second time that the Terra Nova FPSO has had to come ashore for maintenance since it went into production in 2001.  The FPSO has faced a number of serious operating problems. It traveled across the Atlantic Ocean in June of 2006 for a major refit in the Netherlands. It was out of commission for several months and did not resume production until November 15th. It lost 165,000 liters of oil into the ocean in 2004 because of two mechanical failures. In 2008,  the  Terra Nova was out of commission for a few weeks for planned repairs including the replacement of seals in the gas compression system, the installation of a new tip in the flare tower and certification work for regulatory compliance are planned.


The provincial government is coping with a double whammy, the complete loss of royalties from two offshore production facilities and a significant drop in royalties related to a sharp decline in oil prices. That means, the oil being pumped out of the seabed at Hibernia is worth less than the government projected in it's spring budget.  Add to this the loss of $500 million from Ottawa through the Atlantic Accord


Hibernia, Terra Nova and White Rose oilfields have produced about 60 per cent of their original reserves. Those barrels of crude pump significant oil royalties into the provincial treasury, in fact they are the provinces biggest source of revenue.  As production declines, so does the province’s revenue. Hence the Premier's dire warnings about even more "belt tightening"


This summer's reduced production and lower oil prices serves as a harbinger of the future, if more oil production does not come on stream. Keep in mind that  Hebron, which was scheduled for first oil in late 2017,  took over thirty years to develop. The province’s fourth oilfield will create a small production peak.

The news is not all bad.

Statoil’s Mizzen results, while not economical on it's own, prove that  there is more oil out there.
There have been two other discoveries that have become oilfield step-out developments.

At best, the province will loose only 20% of it's revenue from the offshore this summer. At worst, poor projections could result in as much as a 30% loss in projected oil revenues.


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