Wednesday, August 22, 2007

Hebron Deal Inked!

There will probably be an update following the press conference at 12 NST, but right now the Globe is already talking about the deal in vague terms.
The deal will allow the province to earn a 4.9-per-cent equity stake in the project, and has a royalty regime that will ensure the province earns a greater share of the proceeds from oil production than it has from existing offshore projects, sources said last night.

In the last set of negotiations, Mr. Williams et al had three main objectives:
1) A better royalty regime than the standard currently on the books.
2) A 'super-royalty' that kicked in at high oil prices.
3) An equity share.

It seems like we have (1), maybe (2), and that we're going to have to pay for (3). The latter is big, because the current government wants to reorganize Newfoundland & Labrador Hydro into what is essentially a national energy company, something I have mixed feelings on rationally, but gives me warm fuzzies.

I think my demarcation line is right about here. I don't want a government-controlled company actually operating and developing an oilfield. But I get along just fine with equity profits, the accompanying risk, and no management say. Press conference will be interesting.

One of these days, Danny is going to be made a saint. Back when Joey Smallwood brought Newfoundland into Confederation, securing the almighty baby bonus, stories were told of how his picture was displayed in private homes. It went that most homes would have three pictures on the wall: the Queen of England, Jesus, and Joey. Joey would be on top, above the other two.

Time's moved on too much for Danny to receive the same, but one wonders what the province will do for him.

UPDATE: We have project details. Here's the generic royalty regime. Here's what Hebron looks like:

1) A basic ad valorem royalty on the value of production (not profits, this is before costs) that slides from 1% to 7.5%, depending on the amount of barrels recovered and how profitable the extraction is.

2) Once that basic royalty is taken out and the other costs are taken out, the province gets 4.9% of profit from its equity share.

3) As long as oil stays above $50 (presumably for West Texas Intermediate in $USD, given the companies involved), the province will get another 6.5% of the profit.

4) Once Hebron hits the first payout (a rate of return of 5% plus the 10-year Canadian bond rate), the province gets another 10% of the net profit.

5) Once Hebron hits the second payout (if it ever does, a rate of return of 15% plus the 10-year Canadian bond rate), the province gets another 10% of the net profit.

This is something like $16 billion for the province in today's dollars (@ $70/barrel in today's prices), but it won't start coming in to the treasury until probably 2014. Plus another $7 billion for Canada. In other words, more than $30,000 for every Newfoundlander currently residing in the province. Not too shabby. Plus we're not counting the benefits of job creation (the platform may well be constructed locally, which would be another $7billion+ to build), and the general momentum this creates for the oil services industry. In fact, signing the deal makes future exploration more likely, though still not very promising.

Danny has won the money for a mandate. I am anxious to see what can be done.

EDIT: It looks like the equity share will cost the province $110m up front. Source.

ADDENDUM: From CNN, of all places:
There will also be a "slight postponement" of royalty payouts from the consortium, who have dropped their demands for tax breaks, Williams added, but declined to clarify further. He also declined to comment when asked which of the project partners had to surrender part of their share to contribute to the province's 4.9% stake.

Well, the latter will be found out soon enough, but this 'slight postponement' is interesting. I wonder what it means...

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