Tuesday, January 8, 2013

BONANZA DIFFERED


Hebron is going to deliver thousands of jobs and bring stability to the offshore oil and gas industry. First oil is expected to be produced by the end of 2017.

It is a time to celebrate!

Much has been said about the nearly 100% jump in the cost to construct the Hebron Gravity Based Structure. The dynamic increase in construction costs does not bode well for Nalcor’s Muskrat Falls construction estimates.

Private companies are accountable to their shareholders. They do not have the luxury of ring fencing costs. The good, the bad and the ugly have to be presented up-front. All risks are considered. The consortium developing the project can not play loose with the truth. The companies corporate image and it’s stock holders are on the hook. The taxpayers are not!

The new costs will be borne upfront by companies, but in the end the tax payers pay because the project will be a lot longer reaching payout. Escalating costs mean the province will wait longer for super royalties

Last year, ExxonMobil estimated that Hebron would cost $8.3 billion to build. Yesterday, they announced the costs had nearly doubled. The capital costs alone are now estimated to be $14 billion.  This is quite a jump in costs over one year.

In 2011, ExxonMobil indicated that it would cost $8.3 billion to build Hebron, plus another $5.8 billion to operate it until the oil runs out in three decades. Total: just over $14 billion.

In fact, the increased cost of developing the project means that the Newfoundland and Labrador Government will have to find another $700,000 million to cover it’s 4.9% of the construction cost. That is in addition to it’s 5% share of the costs of the proposed new well head platform at White Rose.  It is expensive to be a producer.

The $14 Billion capital costs mean that the company will not meet payout as soon as expected. That means that the Newfoundland government’s coffers will not see the impact of super royalties for a lot longer than originally expected. Compare that with White Rose which started paying 35% royalties after less than three years of production!

Hebron is expected to employ approximately 3,500 people at the peak of construction in 2014. The first oil is expected to be produced by 2017.

What does this mean for the provincial government’s ability to provide services, programs and fund salaries while it waits for the big bucks to roll in?

My questions are: With new costs when will project reach payout? Where is the province going to find a billion dollars for it's share of the capital costs related to these new offshore projects? How does the provincial government justify cutting programs, services and jobs in the short term when it knows new revenues are on the horizon?

No comments: