GNL unclear on Terra Nova

Five questions about today's debate

Unless the provincial government releases the briefing that officials will give the politicians at 8:30 this morning, the rest of us will probably never know the whole truth of what went on in the talks about the Terra Nova project.

Here are some points that stand out from what we know so far. Keep these in mind as the day unfolds.

First, there’s the idea of an equity stake for the provincial government. The issue is so important, the word “equity” appears seven times in the provincial statement on the decision to back off from the project. 

The story from the provincial government last week was that the companies asked the provincial government to take an equity stake.

But on 01 June, the Pea Seas released a portion of a government briefing that said the “Provincial Government had offered to take up to a 15 percent equity stake in the project.

Those two things don’t go together.  Someone needs to explain which story is true.

Second, from the provincial government version last week, it appears the provincial government only offered $30 million of its own cash in what was touted as a half billion package of financial support.

That $500 consisted of $175 million from the federal government’s pot of cash (the province topped that up to $205 million) and what we now know was a break on royalties of $30 million a year over the next decade. 

Last week’s announcement said the royalty break was $300 million over the remaining life of the project. There’s only about a decade of production left in the field (roughly 115 million barrels).

The only change on these issues in the provincial briefing note and the version energy minister Andrew Parsons gave last week is the bit about equity and the extra $30 million in cash.  Otherwise the briefing note version from late April is identical.  There is a small discrepancy but frankly that could just be a matter of rough math by the person who wrote the briefing note.

Third, there’s the statement from Suncor.

“Surprised and disappointed” is nothing what anyone would expect to see in talks of thins kind at very high levels.  Common courtesy would tell the provincial government to let the major partner in the project know about its decision before the news conference.  “Surprised” means the operators thought talks were going well.  They didn’t see it coming.

Fourth, there’s the comment in Terry Robert’s story about the equity stake.  According to Roberts: “The release last month of "The Big Reset," the final report of the premier's economic recovery team, also influenced decision-makers, sources say.”

All that Greene said in the report is this: “Holding oil and gas assets is not consistent with a streamlined government or a government with a high debt load. The financial risks associated with assets of this type are not consistent with the small size of this province.”

Unless Greene said more privately or provided the government with a more detailed assessment, there’s nothing here to change the commitment revealed in the briefing note that pre-dated release of the Greene report.

So what happened?

This goes back to the glaring inconsistency between the internal briefing note the Pea Seas have and the public statements from Parsons and Premier Andrew Furey.

Fifth, the provincial government needs to explain what risks it found so high that it backed away from its equity offer.

In the official statement, Parsons put it this way:

In excess of 85 per cent of current oil reserves for the Terra Nova project have already been produced. Unlike the current project owners, taking on an equity stake as a new partner involves significant risk to the Provincial Government. While the current project owners are already committed to abandonment costs at a future date, the Provincial Government, as a new equity owner, would be committing to costs in the hundreds of millions of dollars without any guarantee of a return.

There’s no mention of a “Come-to-Jesus” moment on the philosophy of holding equity, as Roberts reported.  There’s just a straight discussion of cash and risk.

What was the risk?  Well, it’s not obvious from the numbers flying around last week.

When he spoke with news media last week, Parsons said the companies were working with the assumption abandonment costs would be about $1.0 billion.  A 15 percent share of that would be $150 million. 

At an average of US$50 a barrel, the provincial government stood to make more than that in a single year based on the royalty regime alone and allowing for its willingness to give up about $30 million a year from the existing royalty regime.  Those costs don’t look all that troublesome.

The 15 percent equity position would have brought the provincial oil company $86.2 million a year, gross, again assuming only US$50 a barrel for a decade.

The government  would also have to cough up 15 percent of the refit cost, but that was covered by the federal cash, easily.

We don’t know what the partners who wanted out of the project wanted for their shares.

Based on what’s in public now, it’s hard to see what the risks were, especially from a government that was philosophically open to equity in the project until last week.