Newfoundland hasn’t seen a major oilfield discovery since the mid-1980s
Oil exploration — File Photo
Second in a three-part series
The more exploration wells drilled, the greater the chances of making that next big discovery — something the province’s offshore oil industry hasn’t seen since 1985 when White Rose was discovered.
The typical industry success rate is one out of every 10 exploration wells.
In the past two decades, most of the exploration drilling off Newfoundland and Labrador has been done at a rate of one, two or three per year.
And at that rate, it could take quite a while to make another discovery the size of a Hibernia, Terra Nova, White Rose or Hebron.
“We’ve got a real deficit in the amount of exploration activity,” said Bob Cadigan, president and CEO of the Newfoundland and Labrador Oil and Gas Industries Association (NOIA).
Rob Strong, an industry consultant in St. John’s, said the province’s offshore is viewed as a high-cost area in which to find, develop and operate oilfields.
“The major impediment I always hear is the cost — and it’s not necessarily regulatory or royalties.
“We’re perceived as being high-cost, and we are a high-cost environment.
“But we’re not perceived as being a high-reward area, which we are as well.”
Kevin Roche, general manager of Noble Drilling Canada in St. John’s, agrees with that assessment.
Noble crews the two drill rigs on the Hibernia platform.
“It’s high-cost because it’s a harsh environment and you’ve got high
Bringing a rig from the Gulf of Mexico to Newfoundland waters would require modifications, such as an altered mooring system, steam generators to prevent exposed lines from freezing, and equipping the rig with the kind emergency abandonment systems required in Canada.
“Each one of them is a tick on the price tag,” said Roche. “You’re talking somewhere between $50 million and $100 million.”
Deepwater rigs that are in high demand command high rates.
Roche said the shallow-water rigs used in the province’s oil-producing Jeanne d’Arc basin don’t usually command high rates — “unless you throw in the harsh environment.
“It’s kind of a niche market.”
And it’s one, he said, that Transocean — which owns both the Henry Goodrich and the GSF Grand Banks — is able to fill.
“They get higher rates for these rigs than they’d get elsewhere.”
Dave Keating, a local consultant who spent 35 years in the offshore industry, said hiring rigs for short-term work is expensive.
“A well’s going to cost you $200 million, if it’s an exploration well.
“Very few companies have pockets deep enough to say I’m going to do five of them.”
Instead, he said, they’ll do one well and assess carefully it before deciding to spend more money to drill another well.
“It’s the nature of the business.”
Since deepwater rigs can cost well in excess of $500 million to build, rig owners prefer long-term drilling contracts to help defray the cost.
Keating said worldwide competition for rigs means they go where the owners get the best rates.
“It’s strict business — supply and demand.”
Keating is also a former area manager for Transocean, the company that owns the GSF Grand Banks and Henry Goodrich.
It all means drill rigs top the list of challenges in making new discoveries off Newfoundland and Labrador.
It costs roughly $1 million per day to hire, operate and supply a rig.
As well, the oil companies frequently say it’s difficult to find rigs that are suitable for harsh, iceberg-prone, cold-water environments, such as the North Atlantic.
Added to the price tag is the cost of moving a rig to and from the province.
The Canadian Association of Petroleum Producers (CAPP) said that cost adds an extra $250,000 per day to the rig price tag.
“It could take between 12 and 30 days to mobilize and demobilize, depending on where a rig is coming from,” said Paul Barnes, CAPP’s Atlantic Canada manager.
“So, it’s a big cost saving to industry to have the rigs already here.”
It’s also one reason for the current rig-sharing agreement among Statoil Canada, Suncor Energy and Husky Energy.
That deal for the rig Henry Goodrich runs until 2014.
Tom Kellock, senior consultant for ODS PetroData, doesn’t view Newfoundland and Labrador as a unique market for drill rigs.
“Newfoundland is considered to be a harsh environment area and the potential problems with icebergs make it one of the more difficult areas to work,” he said in an e-mail.
“However, similar issues exist off Greenland, in the Barents Sea and around the northern parts of Sakhalin Island (off the coast of Russia).”
Houston-based ODS PetroData tracks offshore rigs, drill ships and worldwide drilling trends.
Kellock also said some of the new, ultra-deepwater, semi-submersible rigs — such as the Aker Spitsbergen — built for water depths of 3,000 metres, can also operate in shallower waters of 305 metres.
And given the limited drilling activity off Newfoundland, Kellock said it is expensive for companies to get a rig.
“They will have to pay for it to mobilize both to and from the area,” he said.
Suncor Energy’s former East Coast vice-president, Alan Brown, sounded an alarm about the need for increased exploration activity in a January speech to the St. John’s Board of Trade.
“I don’t think it’s high enough and I don’t think it’s timely enough,” he said at the time.
“If we’re not exploring now and successfully discovering the right size of resource and reserve base, then we won’t be able to produce in the future — and the lead time’s significant.”
The three producing oilfields took 18-20 years to develop.
The $8.3-billion Hebron project is expected to take 36 years to bring to first oil.
“We need to be more nimble and we need to be faster,” said Brown.
Cadigan agrees — saying the $1.8-billion North Amethyst project proved a development can be done quickly.
The first expansion of the White Rose oilfield pumped first oil four years after it was discovered in 2006.
“That was a very fast cycle time,” said Cadigan. “We’ve seen the regulator and the province able to cycle a development application really, really quickly in the case of White Rose.”
Brown also said the Hibernia, Terra Nova and White Rose oilfields have all produced 60 per cent of their reserves.
Those barrels of crude pump significant oil royalties into the provincial treasury — accounting for almost $1 out of every $3 in government revenue.
“It’s really quite simple: as production declines, so does the province’s revenue and so does the revenue and business opportunities for our members and so does employment,” said Cadigan.
Hebron, which is scheduled for first oil in late 2017, will help offset some of the steady offshore production decline — but not for long. (See chart for details)
The province’s fourth oilfield will create a small production peak.
“That peak’s fighting the decline in the existing fields, so it’s not going to be as high as the first peak,” said Brown. “But it will mitigate the decline.”
Since 1990, 25 exploration wells have been drilled off the province, according to data on the Canada-Newfoundland and Labrador Offshore Petroleum Board’s website.
One resulted in a new discovery, Statoil’s Mizzen well drilled two years ago.
Two other discoveries were oilfield expansions — Hibernia South and North Amethyst — that led to step-out developments.
“There are exploration wells being drilled and probably largely being drilled to look for ways to provide additional reserves to support existing infrastructure,” said Cadigan.
“Hibernia South is a good example of those kinds of reserves, as is North Amethyst.”
“But we need new development over and above that, as well.”
In recent years, there have been signs of exploration activity.
Suncor Energy and partner Statoil Canada are currently wrapping up their second Ballicatters exploration well, while Statoil also plans to drill another well this summer near its 2009 Mizzen discovery.
Statoil expects to drill another exploration at the Fiddlehead prospect south of the Terra Nova oilfield later this year or early next year.
Chevron Canada is prepping for seismic surveys this summer southeast of the Orphan basin where it drilled a deepwater exploration well last year. These surveys are usually the first step in drilling.
“We are seeing activity, and it’s positive,” said Cadigan.
Monday: Turning the exploration tide