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August 5, 1996
(Executive Council)


The following statement was issued today by Premier Brian Tobin at a news conference held at Hotel Newfoundland:

We are here to witness and participate in a major event in the continuing development of this province's oil and gas industry. Today, in signing a letter of intent with the companies in the Terra Nova project, we have reached a significant step towards the development of the Terra Nova oil field.

I would like to personally welcome and thank Jamie Blair of Husky Oil, Jerry Anderson of Mobil Oil Canada Properties, Norm McIntyre of Petro-Canada, Carl Thompson of Murphy Oil Company Ltd. and Richard Dingwall of Mosbacher Operating Ltd. for joining us here today. I would also like to thank members of the business community and industry representatives for being here to show their support.

This letter of intent clears the way for the Terra Nova participants to file a Development Plan Application to initiate the process which should lead to the development of this Province's second largest oil field.

This process will be handled efficiently. In anticipation of receipt of the application, the Offshore Board, the federal government and the provincial government have concluded a Memorandum of Understanding to permit a joint environmental assessment of the project. The responsibilities of all parties are addressed but instead of three assessment processes there will be only one -- and that must be completed within 270 days.

The province and the companies have worked hard to reach an agreement on fiscal and benefits terms. These terms strike a balance between the legitimate right of the province to be compensated for the production of its oil, and the legitimate right of the consortium to realize a reasonable return on its investment. I believe that both parties respect each other's rights in this regard. We are pleased with the agreement. We believe it is one that will produce significant benefits for this province.

I would like to make it clear from the start that Terra Nova will proceed on a much different basis than Hibernia. The circumstances are very different. Hibernia was the first major project. It was intended to establish the industry, and to that end, considerable government assistance was provided. That move was obviously successful. The industry is now well established, and this announcement demonstrates clearly that we have gone beyond the stage of one oil project, and have developed an oil industry.

But it must also be said that gone are the days when governments can provide billion dollar grants. We simply can't afford to do that any longer.

If Terra Nova was not proceeding on its own merits, it would not be proceeding at all. I am very pleased to say that, with today's announcement, we have begun to establish a sustainable oil industry in this province.

I believe Mr. McIntyre will confirm the view that our offshore is a growth area for the consortium members, and especially for his company, Petro-Canada. We see this announcement as an indication of the confidence that his company and its partners have placed in our offshore.

The recent announcement that Norsk Hydro intends to become a partner and an active player in our offshore area represents yet another strong vote of confidence. Consider this: there are many offshore oil plays around the world where the host governments offer very attractive fiscal terms. But Norsk Hydro chose offshore Newfoundland and Labrador. This is an obvious endorsement of the prospects of our offshore area, and our policy toward the development of our petroleum resources. We certainly see petroleum development as a growth area for the economy of this province as we head into the 21st century.

We recognize the need to be competitive on a global basis. The fiscal terms and benefits principles reflect this. Recent discussions I have had with union leaders involved in the oil industry, reveal that they too, have a clear understanding of this reality. I am encouraged by their attitude. It can only mean more jobs for Newfoundlanders and Labradorians and a strong contribution to the growth of our economy.

We have agreed that the project should proceed on a competitive international bidding basis. Any other approach is simply not sustainable if we are to see our industry grow and prosper. At the same time, the province has struck a good deal on the fiscal side, which protects the interests of the people of this province. The royalty regime for Terra Nova will yield higher revenues than that of Hibernia, which will enable the government to provide a better quality of public service over the long term. At current oil prices, the Terra Nova project will yield twice the royalties as the Hibernia project.

The benefits principles give a clear preference to local companies. The consortium has committed to conduct its affairs in a manner which will facilitate involvement by local companies. They have made significant "best efforts" commitments with respect to the conduct of engineering and fabrication work in this province. They have undertaken to encourage the use of existing fabrication infrastructure in this province.

Governments have not provided the grants and loan guarantees (about $3 billion) as was the case with Hibernia. Regardless of this we fully expect the consortium to live up to its benefits commitments.

These benefits principles will apply no matter what type of production system is ultimately chosen for Terra Nova.

It is highly likely the consortium will transship Terra Nova oil. That oil will be transshipped in Newfoundland when there is a decision by Mobil and Chevron to construct a terminal for Hibernia oil transsshipment in Newfoundland. My position on the transshipment of Hibernia oil has been clearly stated. I will be making a statement on this within the next few days.

The agreed fiscal terms for Terra Nova recognize for the high costs of developing an oil field in a frontier area. They recognize the significant financial and geological risks involved in development. In recognition of these high costs, the province has agreed to provide an RST exemption on capital and operating costs for the life of the project. This is not unlike the provision for Hibernia where RST was reduced to 4 per cent on operating costs. It is consistent with the recently announced generic royalty regime giving all companies operating in the offshore area an RST exemption. It is also consistent with government's intention to harmonize the RST with the federal government's GST, effectively eliminating RST in any event. This RST exemption is also consistent with the Nova Scotia offshore regime and the Alberta royalty regime.

The royalty regime for Terra Nova has a similar structure to that of Hibernia and the recently announced generic royalty regime for the offshore. It is profit-sensitive, and allows government to take a progressively higher share as the profitability of the field increases. It may be unlikely, but if profits become very large as a result of much higher prices and/or higher recoveries of oil, the province's share could ultimately be as high as 42.5 per cent. We cannot and will not have a repeat of the Churchill Falls contract.

In addition, the fiscal terms provide that the Terra Nova participants will arrange their affairs, to the extent permitted by law, to allocate corporate income taxes from the project to this province. To date, the consortium has spent about $400 million on exploration, delineation and preliminary engineering. They expect to spend about $1.6 billion more up to production startup.

Capital and operating costs during the production phase are estimated to be $2.6 billion for the Graben and East Flank portions of the field. The total capital and operating costs for the field development is estimated to be $4.2 billion -- excluding transportation costs.

The province will receive its fair share of both royalty and corporate income tax revenue. Making reasonable assumptions about the type and cost of the Terra Nova production system, a rough estimate of revenues from these sources would be in the range of $1 billion to $1.5 billion over the 15 to 18 year life of the project.

The impact on the provincial economy from revenues and from all the work activity associated with the project, is estimated to be in the range of $2.5 billion to $3 billion.

These are significant benefits for the province and our people. This announcement marks the further development of the oil and gas industry in our province, and supports what we always knew - that we are able to succeed and excel in managing the development of our natural resources.

1996 08 05   11:35 a.m.

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