The long shot that didn't pay off

Russell
Russell Wangersky
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It was a strange one from the beginning. The province’s energy company, Nalcor, usually looks at big energy or oil plays. Instead, it was joining a group of small companies making a wildcat oil play on the province’s west coast, taking a 67 per cent stake in drilling three wells and putting up some $14 million in the process.

It might have been about oil — it might have been about persuasive wildcatters finding the right government ear — it might have been about make work. When I wrote about the project last year, I highlighted what an anomaly the investment was for Nalcor, and how the provincial government was being very careful to couch the investment as being about so much more than just a successful oil discovery.

Here’s then-natural resources minister Kathy Dunderdale, after the first well was drilled: “Over $1.6 million has been directly invested in local and provincial goods and services through Nalcor Energy as a result of this program. These include site and road construction and maintenance; heavy equipment for the rig move and ongoing operations support; diesel fuel for operations; waste management; trucking and brokerage services; well site geology and safety consulting, as well as local accommodations and meals. The majority of rig crews employed on this program are

also from the Great Northern Peninsula …”

All well and good, but even then, the oil play was more than a long shot.

I wrote this last June: unless the wells hit something, “it’s the government proving that it can take part in drilling deep holes. Right now, it has gotten in on the ground floor of a business that might not ever have even one more storey. But one thing’s for sure — it’s one of those sideway steps, $14 million in unusual and out-of-the-ordinary investment that makes you say, ‘there’s got to be another story here.’”

There is another story: we’re out $23 million, not $14 million, and only two of the three holes were even drilled.

Big cash

To put that in fiscal context, the Sprung greenhouse cost taxpayers $23 million, and for a while, flooded the local market with cheap English cucumbers that nobody wanted. Nalcor’s $23 million investment in two dry holes has shown where oil “is not coming from,” to borrow a quote from a Nalcor executive.

If it’s done anything, it’s provided a little more geological information on the Parson’s Pond area, and it’s gobbled up plenty of cash to get that information.

It’s shown something else as well: that the oil industry is not as simple as driving a pipe into the ground and sitting back to enjoy the profits as the black gold gushes in.

There might be a reason why private investors didn’t flock to put their money down those particular holes, named Finnegan and Seamus.

It just might not have been a good investment.

Governments often end up being the investors of last resort, taking long shots on everything from tourism operations to fish plants that can’t find private-sector support anywhere else. The problem is that, especially in the oil and energy business, the cost of being on the front line gets really big, really fast. If you really were going to invest $23 million in tracking down geological information to “grow” an enterprise like the oil industry, it could be spent far more efficiently in broader surveys than it could ever be spent in drilling at two points on the gigantic landmass that is this province.

Now, while you’re thinking about Nalcor and its curious front-end investment strategy in this case, stop and think about something else.

Think about Nalcor’s multi-

billion-dollar front-end plan to develop Muskrat Falls, and while you’re at it, think about how the company’s share of just a small oil play burgeoned from $14 million to $23 million, and still did only two-thirds of the job it expected to do with the original funds.

The two wells completed were 64 per cent over budget, even given that the third well didn’t start. Two-thirds of the work, at 164 per cent of the anticipated cost.

A sobering thought.

Russell Wangersky is The Telegram’s editorial page editor. He can be reached by email at rwanger@thetelegram.com.

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Recent comments

  • Rubber Boot
    February 22, 2011 - 19:48

    Hindsight is wonderful medium Russell. If they didn't invest and lost out on any potential revenues, then your storyline doesn't change, still a sobering thought.

  • gerard
    February 22, 2011 - 19:43

    Don't worry about the 23 million, the expropriated hydro Danny took from GFW and gave to NALCOR is good for over 60 million a year , easy to see why Danny was happy to see the backs of Abitibi's head , rather then help them out like he done with the papermill in CornerBrook.... Central realy needs a voice in gov. come on OCT.

  • David
    February 22, 2011 - 17:19

    The government said that it bwanted to stimulate exploration by the private sector...and after spending $23 million on two wells, NALCOR then says that a third well was not going to be drilled because "it would probably have the same result" as the first two. Well, if you can't appreciate the absolute PR fiasco that statement is to achieving the main goal of this latest episode of Newfoundland ingenuity that this really is, then you just aren't paying attention....and Ms. Dunderdale really would appreciate your continued apathy !

  • Boyd Legge
    February 22, 2011 - 15:33

    Just thinking, is NLCORs estimating better in energy sites (Muskrat) than it was in drilling oil wells? With that same error results the cost of Muskrat will be in excess of $ 10 billion, now is Muskrat such as a good deal?

  • Scott Free
    February 22, 2011 - 12:36

    Sounds like yet another Tory boondoogle that dwarfs the old Sprung fiasco.

  • Ursula Dowler
    February 22, 2011 - 10:45

    A sobering thought Russell , a SOBERING THOUGHT , indeed . One that every Newfoundlander and Labradorian should be more than a little concerned about . This whole matter of Muskrat Falls should go no further until the people of this province have had their say in a PLEBISCITE, and then only after every shred of information about the project is on the table . Then if things go horribly wrong , we have nobody but ourselves to blame . Excellent article btw .