The government of Newfoundland and Labrador has unveiled its first-ever energy plan, a comprehensive strategy that will allow the province to become a “significant” player in the oil and natural gas business over the coming years. Among other things, the province plans to take a 10% equity stake in some oil and natural gas projects, and it is proposing a new natural gas royalty regime.
The 102-page report, titled “Focusing Our Energy,” analyzes the province’s oil and gas and electricity sectors. It includes offshore and onshore exploration maps, a provincial climate change action plan and a natural gas royalty regime.
“The days of our resources primarily benefiting others are gone,” said Premier Danny Williams. Nearly three years ago, Williams walked out of talks with the Canadian government in a disagreement over how to share the province’s oil and natural gs revenues (see NGI, Dec. 27, 2004).
The province was at odds with federal officials over how much effect offshore oil and gas revenue should have on equalization payments to the provinces. Canada equalizes revenue to ensure that the poorer provinces are able to provide the same services as their wealthier peers. Following the federal government’s plan to take back some of the promised provincial energy revenues, Williams and his advisers the following year began work on the long-range energy plan; the draft was issued in November 2005.
History revealed “the price we have paid for lack of proper planning,” Williams said. The strategic plan “will enable us to capitalize on the opportunities related to our energy resources in a meaningful and powerful way.”
According to the report, the province has 10 Tcf of gas and an estimated 60 Tcf of undiscovered gas. It also is estimated to have 2.75 billion bbl of oil and more than 6 billion bbl undiscovered; 6,700 MW of developed hydroelectric power and 6,000 MW undeveloped; and more than 51 MW of developed wind power and more than 5,000 MW undeveloped.
The government plans to establish a working group comprised of provincial authorities and petroleum industry representatives to help develop regulatory and fiscal measures that will encourage exploration. In addition, the province plans to take a 10% equity stake in some of the projects.
The revenues and expertise gained from participating in projects are expected to allow the province to develop the capability “to pursue the strategic development of long-ignored oil and gas reserves, which otherwise might not be developed,” the plan stated. The equity participation won’t be restricted to the projects, but also may include the associated infrastructure, such as pipelines, refineries, gas processing and gas-to-wire power generation.
The Canadian government now holds an 8.5% stake in the Hibernia oil project offshore Newfoundland and Labrador. Under the plan, the province plans to “continue to pursue the transfer” of the stake.
“The federal government has recouped its initial investment with a significant return and the time has come to return this asset to the province,” the report stated.
To December 2006, the province estimated that total net revenue from the Hibernia project was C$14.8 billion. Of that, C$8.8 billion went to the oil companies participating in the project, C$4.8 billion went to other Canadian provinces and C$1.2 billion went to the Newfoundland and Labrador province.
In addition, the provincial government released a draft of the new natural gas royalty regime, which is being undertaken with industry consultation, the premier said. “Targeted” consultations already have taken place with some undisclosed companies with a specific interest in gas development in Newfoundland and Labrador. Once complete, the gas royalty regime also is expected to form the basis of a new generic offshore oil royalty regime.
The royalty scheme has two components: basic royalty and net royalty. Under the plan, the basic royalties would provide a revenue stream to the province “at all stages of a project,” and it would be linked to realized prices rather than volume or project economics. The net royalty would be based on project profitability and reflects the revenue and costs associated with a particular project. Where profitability of a project is higher, the province would share in that profitability. Where profitability is less or declining, the net rate would be lower and the province’s share would decline.
The province also will begin investing revenues from nonrenewable resources into developing a renewable resource economy, powered by hydro, wind and other green energy sources.
The report is available to download at www.gov.nl.ca/energyplan/EnergyReport.pdf.
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