Province Signs Deal on Hibernia Southern Extension

The Provincial Government today signed formal agreements with its industry partners to develop the Hibernia Southern Extension, solidifying the province's 10 per cent equity stake in the project, through Nalcor Energy – Oil and Gas, and a top royalty rate of 50 per cent.

"Hibernia has been a tremendous resource and a great project for investors, the province and the people of Canada," said the Honourable Kathy Dunderdale, Acting Premier and Minister of Natural Resources. "Finalizing the agreements for the extension of this pioneer field is another example of the potential that exists in our offshore. This deal demonstrates the ability of the Provincial Government and its partners to work together in good faith to successfully reach final agreements that are consistent with the principles enshrined and agreed to in our Memoranda of Understanding (MOU)."

The deal formalizes the MOU reached in June 2009. The Hibernia Southern Extension is estimated to return approximately $13 billion to the Provincial Government in royalties, return on investment through Nalcor Energy – Oil and Gas and corporate income tax. This estimate is based on an updated oil price forecast by the international energy consulting firm PIRA.

The Provincial Government, through Nalcor Energy – Oil and Gas, has acquired a 10 per cent equity interest for $30 million in the Hibernia Southern Extension project that will be produced using a subsea tie-back. In addition to its working interest in the project, Nalcor Energy – Oil and Gas has also acquired a significant amount of valuable high-quality geological data for the entire Hibernia field that will be useful in identifying possible future expansions.

The signing ceremony took place today at the Delta Hotel in St. John's. Signing the agreements were Acting Premier Dunderdale; the Honourable Tom Marshall, Minister of Finance; Glenn Scott, President, ExxonMobil Canada; Alan Dunlop, Vice President, Chevron Canada; Alan Brown, Vice President, East Coast, Suncor; Hege Rogno, Vice President, Offshore Upstream, Statoil Canada; Ed Martin, President and CEO, Nalcor Energy; Murray Todd, President and CEO, Canada Hibernia Holding Corporation; Cal Buchanan, Vice President, Joint Ventures and Business Development, Murphy Oil; and, Paul Sacuta, President, Hibernia Management and Development Company Ltd.

"Today's announcement represents yet another tremendous achievement for our province and reaffirms our determination to be full participating partners in the development of our significant petroleum resources," said Acting Premier Dunderdale. "We understand the complexity of this particular deal and recognize that this process was very challenging and intense at times for all of the parties involved in negotiations. All sides worked together admirably over the last eight months to get final agreements based on the MOU. The hard work and continued dedication of the negotiating team and our industry partners demonstrates the respectful relationship that has developed, and enables us to continue growing the province's future in the oil and gas industry."

The deal resolves the decade-long dispute over the deduction of transportation costs by the proponents for royalty purposes. This resolution accelerates payout, resulting in higher royalties for the province in this fiscal year. The same transportation cost eligibility rules as negotiated for the Hebron project will apply going forward.

As part of the deal, the proponents will comply with the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) requirements on research, development, education and training. The proponents will spend $10 million within three years of first commercial production on one or more legacy projects in these areas. The deal also includes a Gender Equity and Diversification Program for all phases of the project.

The Development Plan Application for the Hibernia Southern Extension was filed with the C-NLOPB by the project operator on February 1, 2010. This development will extend production from the main field by an additional five years.

"The oil industry is the engine that drives our economy, representing nearly 40 per cent of the Gross Domestic Product," said Acting Premier Dunderdale. "This particular deal with its 10 per cent equity stake and top tier royalty rate will ensure significant economic gain for all Newfoundlanders and Labradorians during the project's entire lifespan. This is the third MOU that we have negotiated to conclusion through formal binding agreements. Together with our industry partners, we have now reached agreements for the stand-alone project of Hebron and the extensions of White Rose and Hibernia. We have done so on principle, and we have been consistent and thorough in our approach. The increased royalties and equity stakes the Provincial Government has gained as a result of our negotiation approach have already proven their worth to the province in terms of revenue, participation and partnership and will continue to provide significant value in the years to come."

The Benefits Agreement, Hibernia Royalty Agreements and the Closing Agreement can be found at www.nr.gov.nl.ca/nr/. For further information, please see backgrounder and visit www.gov.nl.ca/releases/2009/exec/0616n01.htm. 

Photo #1: The Honourable Kathy Dunderdale, Acting Premier and Minister of Natural Resources, announces that the Provincial Government and its partners have reached an agreement to develop the Hibernia Southern Extension at a news conference in St. John's February 17, 2010.

Photo #2: The Honourable Kathy Dunderdale, Acting Premier and Minister of Natural Resources, signs the formal agreements for the development of the Hibernia Southern Extension. She is joined by (from l-r): Murray Todd, President and CEO, Canada Hibernia Holding Corporation; Ed Martin, President and CEO, Nalcor Energy; Alan Dunlop, Vice President, Chevron Canada, and the Honourable Tom Marshall, Minister of Finance.

Photo #3: The signatories to the final agreements for the development of the Hibernia Southern Extension are (seated from l-r): Glen Scott, President, ExxonMobil Canada; the Honourable Kathy Dunderdale, Acting Premier and Minister of Natural Resources; the Honourable Tom Marshall, Minister of Finance; (back l-r) Murray Todd, President and CEO, Canada Hibernia Holding Corporation; Ed Martin, President and CEO, Nalcor Energy; Alan Dunlop, Vice President, Chevron Canada; Alan Brown, Vice President, East Coast, Suncor; Hege Rogno, Vice President, Offshore Upstream, Statoil Canada; Cal Buchanan, Vice President, Joint Ventures and Business Development, Murphy Oil, and Paul Sacuta, President, Hibernia Management Development Corporation.

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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 Hibernia Southern Extension.

A Development Plan Application for the Hibernia Southern Extension area tie-back project was filed with the C-NLOPB on February 1, 2010.

A Development Plan Amendment has already been approved for the area of the southern extension that is being produced from the existing GBS, known as the AA Block. Production of the approximately 50 million barrels from the AA Block began in November 2009.

The Provincial Government, Nalcor Energy – Oil and Gas and its industry partners – ExxonMobil, Chevron, Suncor, Statoil, Canada Hibernia Holding Corporation and Murphy Oil – reached a Memorandum of Understanding in June 2009 to develop the Hibernia Southern Extension. The partners have been formalizing the binding legal agreements since that time.

Highlights include:

Equity
The Provincial Government, through Nalcor Energy – Oil and Gas, has a 10 per cent equity stake in the Hibernia Southern Extension subsea tie-back project at a purchase price of $30 million. This includes new licences PL 1005 and EL 1093, as well as an area of the main field covered by licence PL 1001.

In addition to its working interest in the project, Nalcor Energy – Oil and Gas has also acquired a significant amount of valuable high-quality geological data for the entire Hibernia field that will be useful in identifying possible future expansions.

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

• In new licence areas PL 1005 and EL 1093, the top royalty rate is 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 rates apply after payout, and are on top of payout 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, the top rate will increase to 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, the top rate will increase to 50 per cent.

Benefits
Engineering and construction work that can be performed in the province shall 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, development, education and training requirements of the C-NLOPB and spend $10 million in the first three years after first oil on one or more legacy projects in these areas.

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

Transportation Cost Dispute
The agreement also resolves the decade-long dispute over the deduction of transportation costs by the proponents for royalty purposes. This resolution accelerates payout, resulting in higher royalties for the province in this fiscal year.

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 less costs being able to be deducted for that time period, which accelerates "payout" of the project and triggers 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.

2010 02 16                                                 11:45 a.m.