Equity, Improved Royalty Regime and Outstanding Local Benefits Highlights of Memorandum of Understanding for Hebron Development

Executive Council
Natural Resources
August 22, 2007
Equity, Improved Royalty Regime and Outstanding Local Benefits Highlights
of Memorandum of Understanding for Hebron Development

After a period of successful negotiations, the Honourable Danny Williams, Premier of Newfoundland and Labrador, today announced the province has signed a Memorandum of Understanding (MOU) with industry partners to develop the Hebron-Ben Nevis (Hebron) oil field. The Premier was joined by the Honourable Kathy Dunderdale, Minister of Natural Resources.

"Today marks a historic day in Newfoundland and Labrador, as we enter into a new era of offshore oil development with unprecedented benefits to the people of our province including taking real and meaningful ownership of our resources, in the form of equity and a new super royalty regime," said Premier Williams. "Determination and strength of conviction have been our guide, and today we have delivered a tremendous agreement for the people of the province, with a fair and reasonable return for our industry partners. Step by step, we are becoming masters of our own house."

The industry partners in the Hebron development are ExxonMobil Canada, Chevron Canada, Petro Canada and Norsk Hydro Canada. Chevron Canada is the designated operator for Hebron, which will be the province�s fourth offshore oil development. With the official signing of the formal agreements, the Province of Newfoundland and Labrador through its Energy Corporation will take a 4.9 per cent equity stake in the project.

"Our government is pleased that as a result of hard work and cooperation between the industry partners and our negotiating team, we have signed a historic MOU for this province which will assist Newfoundland and Labrador in achieving the economic self-reliance to which we have long aspired," added Premier Williams. "We have attained an equity position of 4.9 per cent in the project, an improved royalty regime and thousands of jobs for the people of the province, including the construction of a Gravity Base Structure (GBS). We were determined to raise the bar in terms of local benefits, we stood strong in our position and today we have achieved our goals. We thank our new partners for their acceptance of our guiding principles."

In addition to an equity stake in the project, the province also negotiated an improved royalty regime that will see an additional 6.5 per cent royalty paid on net revenues whenever monthly average oil prices exceed $50 (US) WTI per barrel after net royalty payout occurs.

At the current oil price of approximately $70 dollars (US) with a two per cent allowance for inflation, total revenues of $16 billion (CAD) are expected to accrue to the province over the 25-year life of the project. In addition to revenues for the province, the Federal Government and Canadians are expected to enjoy more than $7 billion in revenues from this project.

Government has maximized local benefits with this agreement. From the start of construction through to the end of oil production, Hebron will generate significantly more employment hours than either the Terra Nova or White Rose projects. It will provide more engineering benefits in the province than committed for the White Rose or Terra Nova projects, more revenue and more fabrication tonnage in the province than either the White Rose or Terra Nova projects.

"This day marks a very positive time in our province�s offshore industry, as we move forward with our fourth project," said Minister Dunderdale. "We have a strong, vibrant oil and gas industry in Newfoundland and Labrador and the development of Hebron will certainly serve to bolster our local companies who have gained tremendous experience through the evolution of our industry. Today�s announcement is good news not only for those directly related to the oil and gas industry, but also to every Newfoundlander and Labradorian who will enjoy the economic benefits of this exciting development."

It will take several months to execute formal detailed agreements; and of course, normal project sanction processes must take place. Once the formal equity, fiscal and benefits agreements are executed, equity will be exchanged and partners will commence project activities. While details are still being finalized, Front-End Engineering and Design (FEED) could start within 18 months, meaning construction could commence as early 2010.

"The road to this day has not been an easy one; however, it has been well worth the wait," added Premier Williams. "There have been many critics and nay-sayers, especially from outside of our province. I would say to those people today to never underestimate the determination and strength of Newfoundlanders and Labradorians. We take great pride in what we have to offer the world, and that includes our natural resources. While we recognize and value the role of industry in the development of these resources, we also stand firm in our conviction that we must be significant beneficiaries of these resources. We are proud today to join with our industry partners to show what can be accomplished when we work together in a spirit of cooperation and good faith."

The Hebron-Ben Nevis field was discovered in 1981 and contains in excess of 700 million barrels of recoverable oil (based on estimates of the Canada � Newfoundland and Labrador Offshore Petroleum Board). The field is located approximately 350 kilometres offshore Newfoundland. The development costs for the project are estimated to be between $7 billion - $11 billion over the 20-25 year lifespan of the field. The owners expect the project to be able to produce 150,000 to 170,000 barrels of oil per day.

Download Audio of News Conference (MP3)

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Media contacts:

Elizabeth Matthews
Director of Communications
Office of the Premier
709-729-3960, 351-1227
elizabethmatthews@gov.nl.ca 　

Tracy Barron
Director of Communications
Department of Natural Resources
709-729-5282, 690-8241
tracybarron@gov.nl.ca

BACKGROUNDER

Highlights of today�s MOU include:

The province will purchase an equity ownership position of 4.9 per cent at a price of $110 million CAD.

Modifications to the Generic Royalty Regime:

The new super royalty for the province is an additional 6.5 per cent of net revenue at higher oil prices (>US$50 WTI/bbl) after net royalty payout;

Provide downside royalty protection by keeping the basic royalty rate at one per cent of gross revenue until project costs are recovered (i.e. simple payout)

Commitment for construction of a Gravity Base Structure (GBS) in Newfoundland and Labrador.

All fabrication work will be completed in the province*, with the exception of the fabrication of the Utilities/Process Module. (*subject to reasonable capacity and human resource availability).

Front-End Engineering and Design (FEED):

Most GBS FEED-phase engineering will be done in Newfoundland and Labrador.
Late FEED transition to the province for work to be performed in the province other than the GBS.
Make available engineering / technical or other professional positions to residents of the province to work in contractors� offices outside the province for any FEED done outside of the province.

Detailed engineering:

Detailed engineering of the GBS (including mechanical fabrication and mechanical outfitting) will be done in the province.
Detailed engineering for any other construction or fabrication work performed in the province will be done in the province.
Make available engineering / technical or other professional positions to Newfoundland and Labrador residents to work in contractors� offices outside the province for any detailed engineering undertaken outside the province.

Other:
The establishment of a Project Management Office in the province, and significant operator team activities including project management and reservoir and drilling engineering.

All procurement and contracting activities to be coordinated and managed out of an office in the province.
Provision of a travel fund, 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.
Request for Proposal (RFP) and bid packages will ensure Canadian standards are met where such standards are appropriate.
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.
Fixed R & D amount of CAD $120 million over the life of the project, provided such commitment meets the C-NLOPB�s requirements.
Includes commitment of CAD $1 million pre-sanction to College of North Atlantic and Memorial University of Newfoundland to enhance skills training.

2007 08 22 12:45 p.m.

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