To date, Hibernia is Newfoundland and Labrador’s (NL) crown jewel of active oil fields, outperforming White Rose and Terra Nova in oil production, while also being the oldest of the three. Furthermore, Hibernia is the type of overachiever that everyone can be happy with: operators, partners, shareholders, and, of course, the provincial government, which receives royalties based on oil revenues.
Recently, however, the federal government–which owns an 8.5% stake in Hibernia–expressed interest in liquidating this asset.
This is, perhaps, an effort to reduce the federal deficit, as well as a response to the fact that the oil field in which Hibernia operates reached peak production nine years ago. In addition, selling its share allows the federal government to reallocate its risk accrued through production- and oil-price-volatility. Whatever the reason, the province is interested in purchasing this asset at Fair Market Value (FMV). The federal government, however, is requesting over $1 billion.
The question, which now much must be posed, is: Does the provincial government’s interest in Hibernia constitute a smart investment for the province?
Hibernia has long outlived its expected field life (although, as of September it still produces over four million barrels of oil per month). Technology has advanced significantly since the discovery of NL’s oil reserves in 1997, however, it is important that the province’s technical staff consult Hibernia’s viability with the operator, ExxonMobil, and its requisite players, including drilling and completions, subsurface, and subsea departments.
Even after extensive consultation, though, it may be difficult to reach a complete understanding of Hibernia’s real asset value.
Crude oil prices are volatile and, while prices remain stable, several traders are bearish on oil’s real value. It is likely, however, that the province will aim for Hibernia’s oil to be trade on futures markets and through forward contracts to hedge risk.
The last point relates to the province’s oil dependence.
In the past, miscalculating oil prices and production levels either generated, or increased, NL’s budget deficits. Is it, therefore, smart to allocate additional government money on a resource that the province is highly dependent on when much of rural NL remains underutilized?
As NL’s government moves forward with its multi-billion dollar Muskrat Falls project in Labrador, it is clear that there is a strategy for, and willingness of, the Progressive Conservative government to take ownership of the province’s energy future. This negotiation will be one of significance for the province and, while it may not be quite as interesting without former Premier Danny Williams as the province’s lead negotiator, it will be worth monitoring.
Tyler Power is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute