Canadian offshore industry in crisis mode

Senior Canadian officials are working in conjunction with the Newfoundland and Labrador Oil and Gas Industries Association (Noia) to petition for immediate assistance to help the region recover from the unprecedented reduction in demand caused by COVID-19 and the catastrophic drop in crude benchmarks. This was exacerbated by an all-out price war between Russia and Saudi Arabia, which flooded the market with product.

To help alleviate the situation, the combined group has requested incentives to encourage investment in offshore exploration and project development, to remain globally competitive. Building on an earlier town hall meeting in April, Noia hosted a second virtual meeting on May 14, to discuss impacts of the current economic situation on its members, and the future of the Canadian offshore oil and gas industry.

Newfoundland and Labrador (NL) Premier Dwight Ball, along with provincial Minister of Natural Resources Siobhan Coady, also has expressed support for a focused initiative, to persuade the federal government to provide immediate assistance to East Canada’s offshore industry. Premier Ball sent a letter to Prime Minister Trudeau on May 21, reiterating that urgent action is required to support Newfoundland and Labrador’s oil and gas industry.

Because the NL government shares the federal government’s goals of environmental protection and reducing carbon emissions, and has committed to achieving net zero emissions by 2050, the offshore industry is a good candidate for assistance and monetary support. However, despite the concentrated efforts, requests to promote the acceleration of exploration and enhance financial liquidity for the offshore oil and gas industry have not yet been met, according to Minister Coady.

ACTION PLAN

“To continue to be globally competitive and attract capital investment, we urgently need a fiscal stimulus from the federal government—not a handout—a stimulus to drive exploration and get development projects moving,” said Kvaerner Canada President and Country Manager Bill Fanning. While assistance to specific facets of the energy industry have been announced by the federal government, officials have indicated that these measures do not go far enough to address their immediate concerns, and will not allow the industry to compete with leading jurisdictions, when operations resume. 

Noia CEO Charlene Johnson

Noia CEO Charlene Johnson put forward two proposals for exploration and development incentives during the meeting:

• Proposal 1. Multi-well exploration incentive program, with graduated reimbursement of capital cost, ranging from 30% to 70%.
• Proposal 2. Atlantic Investment Tax Credit, or similar program, to help current, deferred and future projects (15% short-term to 10% long-term). 

“There should be no resistance to the exploration and development incentives we are seeking. The re-implementation of the federal 10% Atlantic Investment Tax Credit and multi-well plan have already been used in our offshore industry in the past, and have proven effective,” Minister Coady explained.

During the town hall, former Newfoundland and Labrador (NL) Premier Brian Tobin noted that Norway, which put incentives in place during 2005, saw 57 wells drilled in its offshore last year. That is more than the 54 that have been drilled in 30 years off of Newfoundland and Labrador, Fig. 1. He added that oil and gas activity in the province got started in the 1980s after the province provided financial incentives to explorers. “That tells us that oil and gas offshore didn’t get discovered by accident,” he said. “It got discovered by design, and it got discovered because of incentives that really attracted capital.”

Definitive action required. “It has been a death by a thousand cuts,” Johnson continued, during an interview with CBC News. “Our members are really worried about survival. The outlook is very bleak, and we’re really in crisis mode. We need help now, and we need help for many of our member companies.” Noia represents more than 500 members, mainly in the offshore-related supply and services sector. The companies run the gamut from medical services to fire suppression, to supply vessels, to an array of logistics.

More than half of those member companies have laid off employees, according to a recent Noia survey. Johnson said the only way to get past the current crisis is to be globally competitive with other jurisdictions, to attract the scarce investment dollars out there—and that there is a role for Ottawa in helping to make that happen. “While the situation is unprecedented, the solutions are not,” she said. Johnson said federal help could come in the form of a petroleum incentive program, similar to one that promoted frontier drilling and helped kick-start the industry in the 1980s.

Fig. 1. Norway drilled more exploration wells in 2019 (57) than NL has done in 30 years (54).

Noia also said that Ottawa could allow oil companies to once again avail of an Atlantic investment tax credit that they stopped qualifying for nearly a decade ago, when economic times were better. Last month, the feds pledged $75 million to help reduce emissions in the Newfoundland offshore, but industry players said more needs to be done. Johnson said she hopes that federal Natural Resources Minister Seamus O’Regan can take the information presented at the Noia town hall meetings to convince his cabinet colleagues that action is necessary. “I believe there is a genuine sincerity there to help,” Johnson continued. “We just need it to hurry up.”

Seamus O’Regan continued the discussion by saying “exploration is key” to federal help for the NL offshore oil industry. He says the province’s offshore E&P sector competes internationally with Norway and the UK. “These are also jurisdictions that, like us, are committed to net zero emissions by 2050. But they recognize that oil will have a place in the world,” O’Regan said. “And the competition for that place is fierce. We’re very proud of our offshore, and we think that if we could get the similar incentives in place, that we can compete.”

But O’Regan did not provide details on exactly what form those incentives may take here. He said companies would get to keep a little more of their money to put toward exploration, but it remains “revenue-neutral” and would not cost the state any more cash. “It just basically provides liquidity to those companies, and liquidity is something that we have been doing, with not just oil and gas players, but companies all across the country of all sizes,” O’Regan said. “There haven’t been bailouts per se; there’s just been making sure that they have access to cash that will allow them to bridge through this tough time.”

Fig. 2. The overhaul of the Terra Nova FPSO is on hold, due to the high cost of renovation and lack of a Canadian shipyard capable of performing the retrofit.

O’Regan would not commit to a time frame to make an announcement on what the feds plan to do. “I’m working with my colleagues in Ottawa and various ministers, in putting something together that we think will work,” he said. “It’s a meticulous business. It’s something that you want to get right. But we fully understand the urgency of the situation.” He said that he has been dealing directly with CEOs of major industry players to hear what they have to say. “Some of it is regulatory and looking for ways that we can just get rid of duplication and red tape without in any way taking away from the environmental integrity of the regime,” O’Regan concluded.

Less talk, more action. Although Mr. O’Regan has indicated that the federal government is willing to help, it’s time for Canadian authorities to acknowledge that an actual emergency has occurred (i.e. minus $37.63/bbl) and act authoritatively without extended discussion. Decisive action by strong leadership is required to save thousands of jobs and avert damaging indigenous and international operators that are the backbone of the offshore industry. These companies play a vital role in perpetuating the NL economy and infusing capital in large and small communities. In just a relatively short period of time, operators have shut down many offshore projects and/or abandoned plans for future development.

Fig. 3. GDP from oil and gas extraction as a share of total NL gross domestic product.

DEFERRED PROJECTS

In addition to exploration wells that have been postponed, two significant facilities projects have been put on hold in Newfoundland, thanks to COVID-19. One of those is the West White Rose field development. On March 22, Husky announced that major construction activities related to the West White Rose Project were being suspended, due to COVID-19. This includes work on the massive concrete gravity structure (CGS) being built at the Port of Argentia. There has been no definitive word from Husky as to when work might resume.

In addition, the planned drydocking of the Terra Nova FPSO vessel has not moved forward, as originally envisioned, and is being reviewed by operator Suncor Energy, Fig. 2. Back in May 2019, Suncor and the Terra Nova J.V. owners sanctioned plans to proceed with a project to extend the FPSO’s life to approximately 2031. The asset life extension project would allow the facility to capture approximately 80 MMbbl of additional oil, but the vessel would have to go offline for six to seven months.

But in December 2019, the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) ordered a stop to production at Terra Nova, because of a safety deficiency related to fire suppression. Further inspections found more problems. Suncor and the C-NLOPB had been in meetings for months, trying to reach an agreement that would allow the vessel to resume production. However, negotiations were to no avail, with the partners unwilling to invest the estimated $150 million to $200 million required to get approval to operate from the board.

Fig. 4. Average weekly wage from all NL industries combined (including overtime).

On May 5, the company said, “Suncor is currently evaluating alternate options for the Terra Nova Asset Life Extension, as Spain is no longer able to accommodate the planned dry dock work, due to that country’s COVID 19 response.” Unfortunately, the required updates cannot be performed in NL—or Canada, for that matter—say insiders, and missing the window of opportunity in Spain is a setback. “We do not have an approved alternative for the asset life extension project,” confirmed Suncor. And the vessel’s all-important certificate of fitness expires next summer. This means that certifying authorities like Lloyd’s Register North America will demand a major refit before Terra Nova will be allowed to resume production. The future of the Terra Nova is very much in doubt. However, it is certain that the vessel will soon be disconnected from its subsea production systems and then sail into an uncertain future.

According to the local CBC News outlet in St. John’s, this prompted the union representing some 400 workers on the Terra Nova FPSO to raise concerns about a scenario that could see the vessel not produce any oil for the next two years. Unifor Local 2121 President Dave Mercer told CBC, “The members are very worried about their future, and the future of NL.”

The union’s concern was confirmed by a CBC report that during the week of May 11, the Terra Nova J.V. partnership was unable to “formalize” a new plan for the vessel’s overhaul. Thus, the owners have decided to remove it from the field by this summer and sail it to a port at a location yet to be named, for an unknown duration.

Fig. 5. Projected growth in consumer spending will be dramatically reduced without government aid.

Loss of basic industry and growth opportunities. These delays and loss of offshore activity will have a detrimental effect on the entire region and could cause irreparable damage to a vital basic industry. At its peak, the offshore industry contributed 36% of the region’s gross domestic product (GDP) and still provides 23%, adding $6.1 billion to the economy, Fig. 3. The industry is the largest in NL, bigger than the next three combined. The average weekly wage in NL is 6% higher (2017) than the Canadian average—led by high wages provided by oil and gas jobs, Fig. 4. In addition to the potential loss of direct industry employment, growth in consumer spending throughout NL, as a result of expanded activity, will suffer a major decline, Fig. 5.

Operators poised to exit. An NL bidding round, scheduled for November, is still expected to go ahead, although activity may be low, Fig. 6. “I think what we can expect is some contraction, and definitely you’re going to find explorers will do less, and they will focus on the known reserves that they have,” Fanning continued. “This speaks to the urgency of our situation, because at some point, we will have to get selective about the basins that we plan to explore in.” Noia’s Johnson concluded by saying, “since companies are already preparing for the bid round, there is urgency around an announcement from the government now. And because decisions aren’t being made, investment will go elsewhere, and when it goes elsewhere, it’s much harder to get back.”

Fig. 6. Upcoming licensing rounds.

PATH FORWARD

As global demand for petroleum products returns, we need to ensure that our provincial industry can meet this demand in a socially and environmentally sustainable manner, while continuing to be at the forefront of Canada’s future energy sector, said Minister Coady. “The province’s offshore projects are already among some of the lowest carbon intensity emitting facilities in the world.”

As a long-term priority of Advance 2030, NL will be increasing focus on low-carbon technologies and operational processes to achieve leading emissions intensity and benchmarking provincial competitiveness, in relation to other jurisdictions. “In addition, added Minister Coady, “we have committed to achieving net-zero by 2050, leveraging the bounty of natural resources available in our province, including investments in green energy projects and maximizing carbon offset opportunities.”

NL Premier Dwight Ball concluded his letter to PM Trudeau by asserting, “a plan for a strong, environmentally sustainable energy industry is a plan for economic competitiveness. The province is united in our expectation that the federal government will work with the provincial government, industry and community stakeholders to be part of this future.”

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com