Executive Council
Natural Resources
August 20, 2008

Hebron Agreement Signals New Era in Province’s History

Marking a new era of partnership in oil development in the province, the Honourable Danny Williams, Premier of Newfoundland and Labrador, and the province’s oil industry co-venturers today announced and signed the final deal for the development of the province’s fourth offshore oil project, Hebron. The Premier was joined by: the Honourable Kathy Dunderdale, Minister of Natural Resources; Mark Nelson, President of Chevron Canada, the designated project operator; Ed Martin, President and Chief Executive Officer of the province’s energy corporation; Glenn Scott, President, ExxonMobil Canada; Alan Brown, Vice-President, East Coast, Petro-Canada; and, Bruce Brummitt, Senior Vice-President Offshore, StatoilHydro Canada.

“Hebron is a breakthrough agreement for the province and this is a day that all Newfoundlanders and Labradorians can take pride in and celebrate,” said Premier Williams. “The signing of this agreement reflects a bold new era of partnership between government and our industry partners. We have real and meaningful ownership of our resources in the form of an equity stake in this project and a new super royalty regime. We have achieved significant commitments for local benefits for fabrication and engineering, and are now embarking on a major industrial project that will fill our fabrication yards and employ thousands of Newfoundlanders and Labradorians. This marks our emergence as a full participant on the global energy stage and we are pleased to join with our industry co-venturers in the commencement of this project.”

The Premier added that Newfoundland and Labrador has turned a financial corner, and its economic prospects have never been brighter. “We are soon to become a have province, and finally Newfoundland and Labrador is being recognized for the long-standing contributions we have made to the Canadian federation,” said the Premier. “These contributions will continue and expand as the Hebron project comes on stream.”

The Hebron project, located approximately 350 kilometres offshore the island portion of Newfoundland and Labrador, is a joint venture among the province’s energy corporation, on behalf of the Government of Newfoundland and Labrador, Chevron Canada, ExxonMobil Canada, Petro-Canada and StatoilHydro Canada.

“Today represents a major milestone toward the successful development of the Hebron project,” said Mr. Nelson. “The co-venturers look forward to progressing the project through the various stages of front-end engineering to sanction and execution. During construction and throughout the production phase, the Hebron project will deliver significant benefits to the people of Newfoundland and Labrador, generate a competitive rate of return for Chevron and our co-venture companies, including the province’s energy corporation, and provide additional energy supplies for the North American marketplace.”

Under the agreement, the Provincial Government, through its energy corporation, has become an equity owner with a 4.9 per cent stake. In addition to an equity stake, the province has also negotiated major local industrial and employment benefits and a super royalty regime of an additional 6.5 per cent on net revenues whenever monthly average oil prices exceed US$50 West Texas Intermediate after net royalty payout occurs.

Based on the Budget 2008 oil price estimate of $87 per barrel with a two per cent allowance for inflation, the Provincial Government estimates that the 20-25 year project could generate approximately $20 billion for the province and that the Federal Government and other provinces are expected to receive more than $8 billion in revenues from the project. At today’s prices, and allowing for inflation of two per cent, this could be a project worth approximately $28 billion to the province.

“The Hebron project will provide the opportunity for as much work as our fabrication facilities, including Bull Arm and Marystown, can handle,” said Minister Dunderdale. “The Gravity-Base Structure (GBS) will be constructed in the province and is expected to generate over four million person hours of construction employment alone. The Hebron project commits more fabrication work within the province than the Terra Nova or White Rose projects as a result of the world-class expertise and capacity that we have developed here. It also commits more engineering work and provides more revenues than either Terra Nova or White Rose. As a result of the world-class expertise and capacity developed at Terra Nova and White Rose, significant fabrication and engineering work, as well as economic benefits, will remain in the province.”

“Hebron is a cornerstone acquisition for our portfolio and contributes significantly to our production and cash flow objectives,” said Mr. Martin. “It is a high-quality asset that will also provide us with a strong reserve position. As this province’s energy corporation, we are pleased to be a partner. The project is an excellent fit for our long-term strategy and there is also tremendous value for our shareholder and the people of the province. Hebron will allow us to continue to grow our industry expertise and market it around the world.”

The proponents have committed to begin mobilization of the project team and to establish a Hebron project office in St. John’s as soon as reasonably possible to begin detailed project planning. First oil is expected between 2016 and 2018 with production reaching a peak of approximately 150,000 barrels per day two years later. The Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) estimates that the development contains 581 million barrels of recoverable oil. The agreement also commits $120 million for research and development over the life of the project to advance the industry in this province.

The Provincial Government is paying $110 million for its 4.9 per cent equity share in the development and will pay its share of the pre-production and construction costs associated with the project.

The Provincial Government also announced today that it is transferring ownership of the Crown-owned Bull Arm fabrication, construction and deep-water facility to the energy corporation. The transfer will ensure the facility is ready and available for the Hebron project.

The Bull Arm facility was constructed by the Hibernia Management and Development Company in 1990 for the Hibernia project and was transferred to the province in 1998. Since that time, fabrication and other work associated with the Terra Nova FPSO, White Rose project, Voisey’s Bay nickel project and the Henry Goodrich drill rig have been completed at the site. The engineering and energy expertise available within the energy corporation will assist to ensure this key asset is available to maximize the benefits to the province from the number of large-scale construction and fabrication projects on the horizon, including work associated with Hebron, the Voisey’s Bay nickel processing facility at Long Harbour, a possible new refinery, liquefied natural gas transshipment facility in Placentia Bay, and the Lower Churchill hydroelectric project.

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Media contacts:

Elizabeth Matthews
Director of Communications
Office of the Premier
709-729-3960
elizabethmatthews@gov.nl.ca
Roger Scaplen
Press Secretary
Office of the Premier
709-729-4304, 727-0991
rogerscaplen@gov.nl.ca
Tracy Barron
Director of Communications
Department of Natural Resources
709-729-5282, 690-8241
tracybarron@gov.nl.ca
Tim Murphy
External Affairs Manager (Atlantic Canada)
Chevron Canada Limited
709-757-6108, 728-9146
timmurphy@chevron.com
Dawn Dalley
Manager, Corporate Communications
Newfoundland and Labrador Hydro
709-737-1315, 727-7715
ddalley@nlh.nl.ca
 

BACKGROUNDER
The Hebron Project

The Hebron oil field was discovered in 1981 and contains in excess of 581 million barrels of recoverable resources, based on estimates of the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB).

The initial development is expected to be the Hebron field and the West Ben Nevis field with future potential for development of Ben Nevis. The C-NLOPB estimates that the three fields contain in excess of 700 million barrels of recoverable resources.

The Hebron project could be valued in excess of $50 billion for the province, proponents and the Federal Government (assuming a price of US$87 per barrel adjusted for inflation at two per cent per year).
Hebron is located in the Jeanne d’Arc Basin, 350 kilometres southeast of St. John’s, the capital of Newfoundland and Labrador. It is approximately eight kilometres north of Terra Nova, approximately 31 kilometres southeast of the Hibernia development, and approximately 46 kilometres from White Rose. The water depth at Hebron is approximately 92 metres.

With the official signing of the formal agreements, the Government of Newfoundland and Labrador, through its energy corporation, will acquire a 4.9 per cent equity stake in the project with ExxonMobil assuming 36 per cent, Chevron 26.7 per cent, Petro-Canada 22.7 per cent and StatoilHydro the remaining 9.7 per cent.

The Provincial Government, through the energy corporation, will purchase its equity ownership position of 4.9 per cent at a price of $110 million.

Chevron Canada is the designated operator for Hebron.

Construction and fabrication of the Gravity-Base Structure (GBS) is expected to begin at Bull Arm in 2012.

First oil is expected between 2016 and 2018 with peak production of approximately 150,000 barrels a day expected within two years from startup.

BACKGROUNDER
Hebron Agreement Highlights

Acquisition Agreement

  • The Government of Newfoundland and Labrador has acquired a 4.9 per cent equity stake in the Hebron Project for $110 million.

  • A new subsidiary has been created within the province’s energy corporation to hold and manage this interest on behalf of the province.

  • The energy corporation subsidiary (“OilCo”) will pay its share of ongoing project costs and receive its share of all project revenue.

  • The Provincial Government is providing a guarantee for OilCo’s obligations during the construction phase (estimated at 4.9 per cent of $4 - 6 billion, or $200 - $300 million). A liability guarantee is also in place with a capped amount of $250 million during the production phase for OilCo.

Fiscal Agreement

  • The existing generic oil royalty regime will apply with the following modifications:

    • An additional super royalty of 6.5 per cent on top of existing rates any time after net royalty payout where the price of West Texas Intermediate exceeds US$50 per barrel. This results in a top royalty rate of 36.5 per cent when the price of oil exceeds US$50 WTI/bbl.

    • The basic royalty rate remains at one per cent of gross revenue until project costs are recovered (i.e. simple payout).

  • Based on the Budget 2008 oil price estimate of $87 per barrel with a two per cent allowance for inflation, the province estimates that the project could be worth $20 billion to the province.

  • At today’s oil prices and allowing for inflation of two per cent, this could be a project worth approximately $28 billion to the province.

Benefits Agreement

  • Fabrication and Construction in the Province

    • Concrete Gravity-Base Structure (GBS) and GBS mechanical outfitting (estimated 4.1 million person hours)

    • Topsides drilling support module*

    • Topsides drilling derrick *

    • Accommodations module*

    • Flare boom

    • Helideck

    • Lifeboat stations

    • Hook up and commissioning

    • Topsides and GBS mating

    • Structural steel riser components and assembly of offshore loading system components: riser bases, rigid risers, tie-in spools and buoys

    • Subsea drilling template and field mooring system
      (*Subject to reasonable physical capacity and human resource availability.)
       

  • Front-End Engineering and Design (FEED)

    • At least 50,000 person hours of GBS FEED-phase engineering will be done in Newfoundland and Labrador.

    • Engineering / technical or other professional positions will be made available to residents of the province to work in contractors’ offices outside the province for any FEED done outside of the province.

    • Proponents will provide a travel fund of $1 million, to begin during the pre-sanction FEED phase, for travel of Newfoundland and Labrador contractors/suppliers to visit engineering offices for work done outside the province.
       

  • Detailed Engineering

    • Detailed engineering for GBS (including GBS mechanical outfitting) and topsides components to be constructed in the province will be done in the province.

    • At minimum, there will be 1.2 million person hours of detailed engineering in the province.

    • Late FEED will be transitioned to the province for all components to be fabricated in the province.

    • Engineering / technical or other professional positions will be made available to residents of the province to work in contractors’ offices outside the province for any detailed engineering undertaken outside the province.
       

  • Project Management Office in the Province

    • Project management office will be opened in the province as soon as reasonably possible.

    • At minimum, there will be one million person hours of project team activities prior to first production performed in the province.

    • First consideration to Newfoundlanders and Labradorians when staffing this office.
       

  • Procurement and Contracting

    • The operator and the main engineering, procurement and construction contractors will have a contracts and procurement office in the province which will co-ordinate and manage procurement and contracting activities.

    • Proponents will conduct early supplier development workshops for the local service and supply community so contractors can prepare for bidding and establish joint ventures, and promote and encourage technology transfer opportunities.

    • Request for Proposal (RFP) and bid packages will require bidders to use standards that meet the requirements of Canadian authorities.
       

  • Research, Development, Education and Training

    • A commitment of $120 million for research and development over the life of the project provided such commitment meets the C-NLOPB’s requirements.

    • Includes commitment of $1 million pre-sanction to College of North Atlantic and Memorial University to enhance skills training.
       

  • Gender Equity and Diversity

    • The operator commits to:

      • Full access to employment opportunities

      • Implementation of proactive programs and processes to create inclusive work environment and corporate culture

      • Promotion of accountability and responsibility for diversity

      • A comprehensive Gender Equity and Diversity Program

        • Women’s employment plan and business access strategy in which the operator will establish quantifiable objectives and goals for the employment of women throughout the project.

        • Diversity plan that addresses training and recruitment of disadvantaged groups.

      • Implementation, monitoring and reporting for these commitments to
        C-NLOPB, with emphasis on continuous improvement.

Bull Arm Lease Agreement

  • The Provincial Government will transfer ownership of the Bull Arm fabrication facility to the province’s energy corporation. The Bull Arm Site Corporation will be a subsidiary of the energy corporation.

  • Full and timely access to the Bull Arm Site

    • Proponents have an option to lease the site, which ensures the facility is available for Hebron work.

    • The option fee is $1.5 million per year.

    • Option terms permit alternate users on the site if it does not interfere with the Hebron project schedule.

  • Once the option is exercised, the lease period will be six years, with ability to extend on an annual basis if required for Hebron work.

  • During the six-year lease, the lease rate is two per cent of estimated total contracted value of project work at the site.

BACKGROUNDER
Bull Arm Site Corporation

The Bull Arm Site was constructed by the Hibernia Management and Development Company (HMDC) in 1990 for the construction of the Hibernia project and the Gravity-Base Structure (GBS).

Upon conclusion of the Hibernia construction phase, HMDC transferred ownership of the Bull Arm Site to the province for $1 and the Bull Arm Site Corporation (BASC) was formed. At the time the ownership was transferred in March 1998, the Bull Arm Site was leased by PCL Industrial Constructors for the fabrication, hook-up and commissioning work on the Floating Production Storage and Offloading (FPSO) vessel for the Terra Nova offshore oil development.

In 2003, a portion of the Bull Arm Site was leased to North Eastern Constructors Limited (NECL) to fabricate work related to the White Rose Development Project, the province's third offshore oil field. NECL also used Bull Arm to fabricate work for Voisey’s Bay. In 2005, another portion of the site was leased by Penney Energy to complete a refit of the semi-submersible drill rig, the Henry Goodrich.

The site is located close to the communities of Sunnyside, Arnold's Cove and Come By Chance and has provided employment and economic spin-off benefits through the purchase of goods and service to this area. The site is a key asset for the province and it has provided broader benefits to the province through new infrastructure; technical knowledge and expertise; technology transfer; and, an experienced labour force.
In Budget 2008, the Provincial Government announced an investment of $2.75 million into the Bull Arm Site for maintenance and upgrades, as well as to establish a new management structure.

The transfer of the site to be operated as a subsidiary of the province’s energy corporation will ensure the facility is ready and available for the Hebron project, as well as the other major industrial projects on the horizon. The engineering and energy expertise available within the energy corporation will assist to ensure this key asset is available to maximize the benefits to the province from these developments.

2008 08 20                                 12:10 p.m.

 

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