Province Achieves Increased Equity Stake, Top Royalty Rate in Hibernia Southern Extension

Executive Council
Natural Resources
June 16, 2009

Province Achieves Increased Equity Stake, Top Royalty Rate
in Hibernia Southern Extension

In another significant advancement in the province�s petroleum industry, the Provincial Government has delivered its Energy Plan goal of a 10 per cent equity stake as well as a top royalty rate of 50 per cent in the Memorandum of Understanding (MOU) reached with its oil industry partners to develop the Hibernia Southern Extension.

"Hibernia South will increase and sustain production from the Hibernia field, preserving employment levels while providing a significantly greater royalty return for the province than any previous project," said the Honourable Danny Williams, Premier of Newfoundland and Labrador. "With this MOU, we have achieved an unprecedented royalty rate and equity interest. Our government is pleased to join our co-venturers in taking our first oil development to the next level and I thank them for their commitment to our industry and to the province. The revenue to the Provincial Government from the Hibernia Southern Extension project, from all sources, is estimated to be $10 billion based on forecasts by the international energy consulting firm PIRA. We could not be more pleased to have achieved such tremendous benefits for the people from this resource."

Premier Williams also noted the significance of this expansion in comparison to the original Hibernia field. "The original Hibernia field has produced 630 million barrels to date and the provincial treasury has seen $1.9 billion from that production. We expect a further $13 billion from the remaining main field production and this extension adds an estimated $10 billion more in revenue for the province," said the Premier. "In addition, Canada will once again see revenue from Newfoundland and Labrador resources with the development of the Hibernia Southern Extension. On this deal alone, we expect the Federal Government and rest of Canada will see more than $3.5 billion in revenue."

The Hibernia Southern Extension contains an estimated 220 million barrels of oil. The Provincial Government, through Nalcor Energy � Oil and Gas, will acquire a 10 per cent equity interest in the estimated 170 million barrels that will be produced using a subsea tie-back on terms consistent with the Energy Plan. The remainder will be produced from the existing Gravity-Based Structure (GBS) at an enhanced royalty rate to the province of 42.5 per cent on every barrel of oil.

"The Hibernia Southern Extension terms will be precedent setting, building on the Energy Plan objective of a new era in resource development in this province," said the Honourable Kathy Dunderdale, Minister of Natural Resources. "This is a growth project that will utilize infrastructure already in place and it demonstrates the maturing of our industry. We are developing new fields and finding ways to more fully develop maturing and existing fields. We expect the lion�s share of the work required for this extension will be completed in this province. As well, all the partners in the project remain committed to ensuring the highest safety and environment standards."

Upon completion of the formal agreements, Nalcor Energy � Oil and Gas will pay an overall purchase price of $30 million. This is consistent with our Energy Plan terms of recognizing historic costs for Nalcor�s entry into new licence areas.

The signing of the non-binding MOU was announced today by Premier Williams in his address to 700 delegates at the annual Newfoundland and Labrador Oil and Gas Industries Association (NOIA) conference in St. John�s. The partners in the Hibernia Southern Extension are ExxonMobil, Petro-Canada, Chevron, Murphy Oil, Canada Hibernia Holding Corporation, StatoilHydro and, upon signing of the formal agreements, Nalcor Energy � Oil and Gas.

The Premier also confirmed today that after nearly 12 years of production, the Hibernia project is now in "payout," meaning that on the main part of the original Hibernia field the province is now receiving a royalty of 30 per cent of net revenues.

In addition to the unprecedented equity stake, three new super royalty areas are included in the MOU. The first is for new licence areas (PL1005 and EL 1093), for which the top royalty rate will now be 50 per cent. This super royalty is incremental to the royalty rates of 30 per cent and 42.5 per cent, and will be paid out in two steps � an additional 2.5 per cent when oil is equal or greater than US$50 West Texas Intermediate (WTI) and another five per cent when oil reaches US$70 (WTI), which brings the total royalty to 50 per cent.

The second is for the portion of Hibernia South that is contained within the original licence area (PL 1001), but will be developed with the new subsea facilities. This new super royalty is on top of the payout royalty rate of 30 per cent and will be paid out in two steps � an additional 7.5 per cent when oil is equal or greater than US$50 (WTI) and another five per cent when oil reaches US$70 (WTI), which brings the total royalty to 42.5 per cent.

Finally, for the part of Hibernia South where oil will be produced from the existing GBS, an additional 12.5 per cent has been applied, effective immediately. This new enhanced royalty of 42.5 per cent has no price trigger.

Using the Hebron agreement as a template, this MOU also contains a commitment to implementing a Gender Equity and Diversity Program for all phases of the project. This program will ensure full access to employment opportunities for qualified women and disadvantaged groups by creating proactive programs and practices that will contribute to an inclusive work environment and corporate culture. The research and development guidelines set by the Canada-Newfoundland Offshore Petroleum Board will also be met for the Hibernia Southern Extension.

The MOU also resolves the decade-long dispute over the deduction of transportation costs by the proponents for royalty purposes. For many proponents, this resolution accelerates payout, resulting in higher royalties for the province in this fiscal year. With the past settled, going forward the proponents will use the same cost eligibility rules as negotiated for the Hebron Project.

The text of the Premier�s address to NOIA is available at

//www.releases.gov.nl.ca/releases/speeches/2009/default.htm

-30-

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, 709-690-8241 tracybarron@gov.nl.ca	Karen O'Neill Manager, Corporate Communication and Shareholder Relations (Acting) Nalcor Energy 709-737-1427, 690-2012 koneill@nalcorenergy.com

　

BACKGROUNDER
Hibernia Southern Extension

Discovered in 1979, the Hibernia oil field is located in the Jeanne d�Arc Basin, 315 kilometres east southeast of St. John�s. First oil from Hibernia was produced in 1997.

In 1996, the Hibernia field was estimated to contain 666 million barrels of oil by the Canada-Newfoundland Offshore Petroleum Board (CNLOPB). That estimate has since increased to 1.244 billion barrels of recoverable oil, including the estimated 220 million barrels contained in the Hibernia Southern Extension.

The project operator for the existing Hibernia field is the Hibernia Management Development Company Limited (HMDC). The partners in HMDC are ExxonMobil, Petro-Canada, Chevron, Murphy Oil, Canada Hibernia Holding Corporation and StatoilHydro.

In May 2006, HMDC filed a Development Plan Amendment with the CNLOPB to begin extracting oil from the area known as Hibernia Southern Extension. Since that time, HMDC has been working diligently to provide additional information. Technical information to support the new Development Plan Amendment was submitted to the CNLOPB in July 2008. A new Development Plan Amendment has not yet been filed for the southern extension area tie-back project. A Development Plan Amendment has been filed for the area of the southern extension that will be produced from the existing GBS. It is currently with the CNLOPB for review.

At the same time, the Provincial Government and the proponents have been negotiating the terms under which the Hibernia Southern Extension would be developed. The non-binding MOU that has been reached upholds the goal of the Energy Plan of 10 per cent equity in future projects. The parties will now negotiate the final, binding formal agreements.

Highlights of the Memorandum of Understanding (MOU) reached between the Provincial Government and the Hibernia partners include:

Equity

The province, through Nalcor Energy � Oil and Gas, will have a 10 per cent equity stake in the Hibernia Southern Extension subsea tie-back project, estimated to contain more than 170 million barrels. This includes new licences PL 1005 and EL 1093, as well as an area of the main field covered by licence PL 1001.

Nalcor Energy � Oil and Gas will pay an overall purchase price of $30 million. This is consistent with our Energy Plan terms of recognizing historic costs for Nalcor�s entry into new licence areas.

Royalty
Three new super royalty areas are included in the MOU:

In new licence areas PL 1005 and EL 1093, the top royalty rate will now be 50 per cent. The super royalty is paid out in two steps � an additional 2.5 per cent when oil is equal or greater than US$50 West Texas Intermediate (WTI) and another five per cent when oil reaches US$70 (WTI). The super royalty applies after payout, and are on top of royalty rates of 30 per cent and 42.5 per cent.

For the portion of Hibernia South that is contained within the original licence area (PL 1001) but will be developed with the new subsea facilities, the super royalty is also paid out in two steps � an additional 7.5 per cent when oil is equal or greater than US$50 (WTI) and another five per cent when oil reaches US$70 (WTI). The main field is in payout, so these rates are on top of the 30 per cent royalty rate provided for in the original Hibernia royalty contract, which brings the total royalty to 42.5 per cent. Should supplementary royalty payout be achieved under the terms of the original Hibernia contract be achieved, the top rate will be 50 per cent.

An enhanced royalty rate of 42.5 per cent on every barrel of oil from the Hibernia Southern Extension that will be produced using the existing Gravity-Based Structure (GBS) as opposed to the subsea tie-back, estimated at more than 50 million barrels. This additional 12.5 per cent royalty is effective immediately. It has no price trigger. Should supplementary royalty payout be achieved under the terms of the original Hibernia contract be achieved, the top rate will be 50 per cent.

Benefits

Engineering and construction work that can be performed in the province will be performed in the province.

Local manufacturers, consultants, contractors and service companies will be able to participate on a competitive basis in the supply of goods and services.

It is expected that the majority of expenditures required for the Hibernia Southern Extension will be spent locally, inclusive of drilling, which makes up the bulk of project costs.

The proponents will comply with the research and development and education and training requirements of the CNLOPB.

Gender Equity

The proponents will develop and implement a Gender Equity and Diversity Program for all phases of the project. The program will include separate employment plans and business access strategies for women and disadvantaged groups with quantifiable objectives and goals. All main contractors on the project are required to comply with these programs.

Transportation Cost Dispute

The MOU also resolves the decade-long dispute over the deduction of transportation costs by the proponents for royalty purposes.

As part of the MOU, the province and the proponents have agreed that tanker costs will be deducted according to the province's interpretation of the Hibernia Agreement retroactively to 1997 and forward to July 1, 2009.

This will result in higher royalties being paid to the province for that time period, which accelerates "payout" of the project, triggering an earlier increase in the royalty rate paid to the province from five per cent to 30 per cent.

After July 1, 2009, the proponents will use the same cost eligibility rules as negotiated for the Hebron Project. The Hebron transportation principles allow proponents to deduct reasonable transportation costs related to getting oil to market, and set a fixed rate of return associated with transportation assets used for that purpose.

Other

Nalcor Energy will pay a processing fee of $2.50 a barrel on its oil.

Formal agreements are expected to be executed by February 2010.

2009 06 16 8:55 a.m.

All material copyright the Government of Newfoundland and Labrador. No unauthorized copying or redeployment permitted. The Government assumes no responsibility for the accuracy of any material deployed on an unauthorized server.
Disclaimer/Copyright/Privacy Statement