Managing your oil money

\When Nalcor president and CEO Ed Martin laid out the Crown corporation’s financial situation at this year’s annual general meeting, Nalcor Oil and Gas was pegged as a corporate arm with profit numbers ready to run upwards.

A subsidiary of Nalcor Energy, Nalcor Oil and Gas is charged with encouraging exploration and managing the provincial stake in the Hibernia Southern Extension project (10 per cent), the White Rose Extension project (5 per cent) and the Hebron project (4.9 per cent).

Stake in an offshore project is not simply a cut of the oil produced. Partners pay a share of development costs as well, equivalent to their stake.

For Nalcor Oil and Gas, with stake in projects just up and running or still under development, with subsea work at Hibernia and Hebron yet to get underway, the real financial benefit of offshore partnerships have yet to be felt.

“There is still significant capital investments we’re making,” Nalcor Oil and Gas head Jim Keating said of the projects, speaking with The Telegram Friday in St. John’s.

That said, depending on oil prices and how project work progresses, Nalcor Oil and Gas is forecast to see a positive net cash flow about 2015. As of 2017-2020, it is set to be clearing “hundreds of millions” from oil, Keating said.

The total brought in from Nalcor’s oil in 2011 was $88.5 million, up from $15.3 million in 2010. Net income of $39.1 million was up from a loss of $2.5 million in 2010, due to an increase in production year over year and better prices. In 2011, first oil was celebrated at the Hibernia Southern Extension.

Where the money goes

As the dollars roll in, a little surplus is kept for any jams down the road. Consistent, additional surplus is kicked up as a dividend to the parent company, Nalcor Energy.

The management and board of the parent company, including Martin, then decide where the oil money is re-invested. It might go towards Newfoundland and Labrador Hydro, to help replace aging transformers, or towards a new renewable energy development.

Those large capital costs would otherwise — if unable to be paid from Nalcor’s other revenue streams — have Nalcor Energy seeking an injection of funds from the provincial government.

“In a case such as this, when I go to partner project meetings and we talk about different development concepts, I know always first and foremost I’m thinking what’s in the best interests of the province and what my government will be looking to achieve,” Keating said.

“Success has to be, at the end of the day, the province getting its needs fulfilled, and the proponent achieving at its end and having its needs fulfilled.”

Control and response

Keating said Nalcor Oil and Gas works with policy-makers and regulators, but has a very different role than both.

“We’re able to participate at the company level,” he said, adding participation benefits both the pro­vince and the oil companies.

Having a seat at the table can be important when disputes arise, he said, “to understand what truly is a problem and what are real, possible solutions.”

Conversations at the project table stay within Nalcor Oil and Gas. Legal agreements and agreed roles insulate Nalcor’s oil representative, keeping confidential project information from even, say, the Nalcor subsidiary responsible for managing Bull Arm.

It also keeps Nalcor Oil and Gas from sharing confidential information on reserves without the blessing of the project partners.

“We don’t often come into difficult situations. The province is supportive of the oil and gas industry. The oil and gas industry has been good to the province,” Keating said.

As for equity stakes, Keating said oil companies have gone from an initial resistance to equity participation, to “where we’re participating and providing value to the partners.”

“In the world, 75-80 per cent of the world’s oil is managed or contracted or owned by state-run oil companies,” he said, explaining the arrangements here are not far out in left field.

“There’s a range of state oil companies in terms of how embedded they are. Some look like a government department. Others, at the other end of the spectrum, look like private sector, a stock-listed company. There’s a range, then, in the culture and the attitudes and the approaches. … We fit somewhere in that paradigm.”

afitzpatrick@thetelegram.com