Hibernia Oil Project Started at Last
Analysts say government-aided venture will turn a profit only if oil stays above $27 a barrel
ST. JOHN'S, NEWFOUNDLAND — FOR decades, Newfoundlanders have heard tantalizing talk of offshore oil and the prosperity it would someday bring to their island's chronically troubled economy. In 1979, exploratory drilling confirmed the existence of major oil fields beneath the rich fishing grounds of the Grand Banks near the eastern limits of Canada's territorial waters. These finds led to a chain of extravagant promises by politicians, followed by a series of delays that made many island residents give up on oil.
``We thought this oil thing had been just about talked and studied to death,'' one Trinity Bay fisherman says.
Then in September, as Iraq's invasion of Kuwait sent world oil prices soaring, the long-awaited deal was struck. In October work began on the $5.2 billion (Canadian; US$4.48 billion) Hibernia oil project. Mobil Oil Canada denies any direct link between the Gulf crisis and the start-up.
A consortium of four oil companies, led by Mobil Canada and including Chevron Canada, Gulf Canada, and Petro-Canada, will employ technology borrowed from North Sea oil fields to extract an estimated 525 million to 650 million barrels of crude from the Hibernia field, about 195 miles southeast of St. John's.
Despite the project's alliance of government and multinational corporation backers, Canada's business community is worried about the project. Toronto's Financial Post says oil prices will have to stay at a minimum of US$27 a barrel in order for Hibernia to just break even.
Financial columnist Peter Newman wrote recently in the newsweekly Maclean's: ``The armed standoff in the Gulf is dragging on, but it's not going to last for another 25 years. Yet that's how long Hibernia will be producing oil, and without the current, artificially high prices, the project simply is not viable.''
The reason for Hibernia's high costs: the oil reserves lie in a dangerous area known as ``iceberg alley.'' In February 1982, Mobil's Hibernia exploration rig, the ``Ocean Ranger,'' sank in a gale, with the loss of 84 lives.
Oil production, scheduled to start in 1996, will be done from a mammoth 188,000-ton reinforced concrete platform, called a gravity-based structure (GBS), that will rest on the ocean floor in 300 feet of water at the production site. The GBS will house two drilling rigs and 300 workers and store 1.3 million barrels of oil. Its scalloped sides are designed to fend off icebergs.
Crude from 48 or more sea-floor wellheads will be delivered to the GBS by undersea pipelines. Similar lines will carry oil from the GBS to floating loading stations more than a mile away, where it will be transferred to tankers for delivery to market.
Mobil and its partners expect to produce oil from the Hibernia field for about 18 years. They estimate that production will average 110,000 barrels a day during the project's most productive years.
Little economic boost
Bob Kimberlin, a veteran of Mobil's North Sea operations, has an Oklahoma drawl that serves him well in Newfoundland, where country Western music is king despite the island's easterly location. As president of the consortium's Hibernia Management and Development Company Ltd., Mr. Kimberlin has tried to dampen unrealistic expectations about the project's benefits. But he also told reporters recently that ``Hibernia does have the potential to change this place forever'' - especially if its success leads to the development of other major oil fields that lie close to Hibernia in the Grand Banks.
Oil royalties were supposed to fuel Newfoundland's transformation to prosperity. Now, as construction of the project begins, the promise of royalties remains dubious - unless oil prices stay high - under the terms accepted by Newfoundland Premier Clyde Wells in his 1988 negotiations with the Hibernia consortium. Even if there are royalties, the equalization funds that Ottawa pays to poorer provinces will be reduced by 98 cents for every dollar of royalties Newfoundland reaps.
Government aid for oil
Moreover, Newfoundlanders will be sharing directly or indirectly in Hibernia's development costs. At a time when the province of Newfoundland and Labrador is facing a $120 million deficit, the provincial government is putting up more than $22 million in subsidies for Hibernia and foregoing revenues of $300 million or more through tax concessions. The Canadian government, for its part, is offering a $1 billion (US$863 million) grant and $1.66 billion in loan guarantees.
Noting such subsidies, Ian Doig, editor of Doig's Digest in Calgary, a newsletter on the oil and gas business, says the Hibernia project ``doesn't make economic sense'' unless oil stays well above US$27 to $28 a barrel. One of the partners, Gulf Canada, has been trying to sell a 12.5 percent interest in the project, he says.
Hibernia will mean jobs for Newfoundland, perhaps as many as 2,000 of them a year, on average, for the 26-year life of the project. But economist Wade Locke of Newfoundland's Memorial University says Ottawa could create more than 2,600 jobs a year over the same 26-year period by simply withdrawing the $1 billion grant to Hibernia's operators and investing it instead in long-term bonds paying 12 percent interest. Mr. Locke estimates Hibernia's direct and indirect impact on Newfoundland will mean a drop in unemployment ``from its current level of 15.8 percent to 14.7 percent, a noticeable and significant change but probably smaller than most people expect.''
In a bid to ensure labor peace, the consortium has promised all Hibernia project jobs to 14 construction unions. Small towns like Sunnyside, where the giant drilling platform for the project will be built, suffer from severe unemployment, and people here are outraged that unskilled jobs are going to union members, most of whom come from St. John's, the provincial capital.
``The hungry people and those out of work are those that should be benefiting,'' says Mrs. Alma Snook, whose son Morely will be displaced from his fishing job by Hibernia construction. The GBS is being built in a cove just outside of Sunnyside, where the local fishermen ply their trade.
Sunnyside mayor Harvey Thistle says, ``our unemployed are seeing union people getting $17 an hour for cutting brush. If anyone's going to get the pollution and problems from Hibernia, Sunnyside will. Our fishing will be destroyed for the foreseeable future, but we're not getting any jobs from this at all.''