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N.L. government releases report on international competitiveness in oil and gas investment

The West Hercules offshore drilling rig. A new report examines the competitiveness of Newfoundland and Labrador’s offshore oil industry in comparison with other jurisdiction.
The West Hercules offshore drilling rig. A new report examines the competitiveness of Newfoundland and Labrador’s offshore oil industry in comparison with other jurisdiction. - Submitted

Compared to some of the province’s peers and competitors in the offshore oil and gas world, Newfoundland and Labrador remains an attractive jurisdiction for industry players, but it’s not without challenges.

This is according to the Newfoundland & Labrador Competitiveness in Oil & Gas Investment jurisdictional review completed by Wood Mackenzie and released Monday by the provincial government.

“Positioning Newfoundland and Labrador globally as a preferred location for oil and gas development is a key commitment in The Way Forward, and this jurisdictional review will help our government deliver on that commitment by providing a better understanding of our current global competitiveness,” Minister of Natural Resources Siobhan Coady stated in a news release.

The main purpose of the report is to identify where challenges exist against the key factors that affect offshore exploration and development decisions.

The factors include geological prospectivity and availability of data, geopolitical and above-ground risks, cost and operating environment, fiscal regime and regulatory structure, and break-even price.

To do so, the factors were analyzed relative to a list of peer jurisdictions that includes Australia, Brazil, Ireland, Mexico, Norway, Nova Scotia, the United Kingdom and the United States’ activity in the Gulf of Mexico.

“From the study, it was apparent that there are a great many areas where Newfoundland and Labrador compares favourably with competing international jurisdictions, and this is borne out by the continued investment and commitments companies are making in the province,” Wood Mackenzie vice-president David Parkinson stated in a news release.

“However, as in any jurisdiction, a number of areas have been highlighted where Newfoundland and Labrador can focus efforts to ensure it remains as competitive as possible.”

The government says some of the challenges and the plans for tackling them were identified in Advance 2030: A Plan for Growth in the Newfoundland and Labrador Oil and Gas Industry, which was released earlier this year.

Paul Barnes, Atlantic director for the Canadian Association of Petroleum Producers, applauded the government’s efforts to understand how the province stacks up against other oil and gas jurisdictions, but said the provincial government needs to work with Ottawa to address the barriers to investment that exist.

“We have seen a layering of added costs and regulatory impediments in recent years which is concerning, particularly in the current economic environment,” Barnes said in an emailed statement.

He also cautions that the report does not take into account changes to the regulatory environment on the way in the coming months and years, which include the Impact Assessment Act, carbon pricing/policy and UNCLOS Article 82.

Obtaining data

While prospectivity is a challenge in some other jurisdictions, Newfoundland and Labrador, thanks in large part to two potentially large pools in the Flemish Pass sub basin, is in a relatively good position among the peers group.

The Flemish pass accounts for only three per cent of the province’s offshore area.

“Recent substantial discoveries in the Flemish Pass have de-risked the area and demonstrated the potential for sizeable discoveries,” the report reads.

“Looking forward, N.L. has identified several new sedimentary basins and recent seismic acquisition and analysis has identified 650 leads and prospects which speaks to the potential for new discoveries.”

But the report quickly points out that even with attractive offshore acreage, the province is still competing with other jurisdictions such as Brazil, Mexico, the U.S. in the Gulf of Mexico and Norway.

The report suggests that continued geological studies will improve prospectivity and that $2.6 billion in exploration work commitments for the Flemish Pass and West Orphan Basin, despite low oil prices, will keep the industry’s interest piqued.

Geopolitical considerations

When factors related to access such as ease of entry, contract sanctity, state presence, regulation, corruption and geopolitics are weighed, the province scores well in comparison to its peers.

“The only area where it does not score a zero (the most attractive score) is state presence and this relates to the equity participation of Nalcor Energy in certain projects,” it reads.
“At the same time, the effect on overall returns of Nalcor’s presence is much less than the effect of national oil company involvement in many other jurisdictions.”

The province, along with Nova Scotia, ranks well on above-ground development risk, but strong ocean currents, icebergs, freezing conditions and other natural phenomena are a cause for concern with implications on cost, physical environment, supply chain, already relatively low level of oil and gas activity, and local content.

“On this last point, N.L. needs to ensure that any local content provisions do not reduce the overall attractiveness and competitiveness of the jurisdiction vis-à-vis competing areas.”

The report also suggests the province struggles with commercialization compared to the peer group, and it’s attributed to the lack of gas infrastructure and currency risk.

“For gas resources, N.L.’s current use of natural gas for enhanced oil recovery, distance to market and lack of pipeline infrastructure impedes its ability to commercialize its discovered gas resources. Future opportunities for development will be dependent on markets, resource availability and project costs,” the report stated.

“With respect to currency risk, the Canadian dollar remains exposed to fluctuations on account of the performance of the oil and gas sector.”

Cost and operating environment

While acknowledging the challenge of assessing the competitiveness of the province’s cost environment relative to other jurisdictions, Newfoundland remains among the highest-cost areas.

The capital required to get a project going and its continued operation is almost $14 higher per barrel of oil than the average for deep-water projects in other jurisdictions as a result of the high cost of drilling, followed by the cost of production facilities.

The report states that the rig intake process contributes to the cost because only a small number of drill rigs in the global fleet meet the criteria for operating in the province’s offshore.

Fiscal and regulatory regimes

Among the peer jurisdictions, Newfoundland and Labrador lands somewhere in the middle as a result of being fiscally attractive — thanks to a competitive government take percentage — but still fiscally unstable, due largely to varying fiscal terms from one project to the next.

An area where the report says the province could make improvements is in its regulatory regime, specifically research and development, local content and development permitting.

“Development permitting in N.L. scores less attractively than it could, due to the number of potential steps and consultations required in order to have a development plan approved,” it reads.

“This includes the benefit plan which typically has to provide secondary benefits to the jurisdiction’s economy. In some areas such as Brazil this has been detrimental to industry’s development as regulatory agencies have slowed the pace of activities which has been exacerbated by onerous local content stipulations.”

Parkinson stated the province needs to ensure regulatory requirements throughout the life of a project don’t add to costs or create delays.

“Newfoundland and Labrador needs to work alongside companies to not only promote the potential within the province, but also share a joint view on the strategy for the oil and gas industry in the province.”

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