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Newfoundland and Labrador’s ‘Clean Oil’ in a Global Context

in Analysis/Opinion by

You’ve seen the argument: Newfoundland and Labrador produces some of the cleanest oil in the world. If there’s going to be oil burned for the next several decades, It Should Be Our Oil. Never mind Alberta and its tar sands; Hibernia, White Rose, Terra Nova, Hebron—these are world leaders in environmentally sound oil extraction. 

How true are these statements? And do they justify the province’s goal of doubled production by 2030?

To answer these questions, we need to evaluate the current oil-producing projects in the province and their place in the market. There are four of them at present, as mentioned previously. The granddaddy of these is Hibernia.

Did you know oil from Hibernia is called Hibernia Blend? It’s a balanced crude that’s just slightly heavier and more sour than Brent Crude. But it’s similar enough that it trades at only a small discount from Brent, which is one of the “gold standard” or “index” products of the crude oil world. 

Looking at a 2018 issue of S&P Global’s Marketwire (remember 2018? Oh, halcyon days of yore!), Hibernia, Terra Nova and White Rose were all trading under a dollar less than Brent, which at the time was right around $72. No wonder they gave it that Starbucks-worthy name!

Hibernia’s been operating long enough that it shows up in most data sets. According to the Oil Climate Index, the carbon footprint of Hibernia’s 115,000 or so barrels a day is around 487 kilograms of CO2 per barrel, which sits slightly below one of the largest producers in the world, Saudi Arabia’s Ghawar field, at 491 kgCO2e.

So, we can rest easy knowing that Newfoundland and Labrador is, indeed, selling a high-quality product at a low, low carbon footprint. Right? 

Except Ghawar’s production is well over 30 times larger than Hibernia’s. So what do we know about the economics of these two oil fields?

Using 2020-equivalent dollars, the cost of the Hibernia Gravity Based Structure was roughly $12.4B dollars. The platform was built based on an estimated reserve size of 615M barrels of oil. So that first reserve bore a $20/barrel capital cost premium. The plan was to spend another $8.1B (2020 dollars) to operate the thing over what was supposed to be a 20-year lifespan, adding another $13/barrel.

Those reserves have since been revised to 1.47-1.95B barrels, which is a fantastic win for Exxon and its partners, including the Government of Canada. It hugely improves the cost-effectiveness, dropping that capital cost amortization down well below $10/barrel.

If we look at a newer project like Hebron, the capital costs haven’t changed that much. Hebron was originally budgeted at a capital cost of somewhere between $4.85B and $7B, but eventually hit $14B—eat your heart out, Muskrat Falls!—with another $5.8B in estimated operating costs. The project was planned around a reserve size of 700M barrels over a 20-year lifespan, bringing the cost of extraction into the $28/barrel range. The split on these costs was $20 for capital vs $8 for operations.

Maybe Hebron sees the same kind of expansion as Hibernia. Thus far the proven reserve totals a mere 472M, with the “probable and possible reserves” reaching as high as 975M, but technology is always advancing. Miracles happen. What does Hebron look like at 1.5B barrels? Or 2.1B? That operating cost sounds really low, at the very least, compared to the Hibernia numbers. Surely we’re getting better over time? 

Well, sort of. Hebron could conceivably improve its prospects a lot if the fields experienced similar fortunes, and obviously more oil is better for the economics. Hebron was built with different assumptions in mind, but it’s also not the first rodeo here in the province. So let’s give it the benefit of the doubt and say they manage to double the size of the reserve over the long term.

How does that stack up against the bigger players?

Well, let’s take a moment to look at Saudi’s production. Ghawar, the megafield mentioned previously, produces a barrel of oil at a carbon debit of 4 kgCO2e vs. the oil produced at Hibernia. The received wisdom was always that its peak production was around 5M barrels per day, but it turns out it’s likely significantly less, closer to 3.8M per day. Still, that’s 33x Hibernia’s output. 

But the real number to look at is the costs per barrel, and this is where reality must sink in. Saudi Arabia’s costs per barrel are under $9/barrel. That’s it. $3.50 in capital costs, $3 in operating costs, and a couple of bucks for administration and transportation. 

Folks in the offshore industry will tell you that that doesn’t matter if you care about the environment, if you care about human rights, etc. But it seems obvious that you cannot have a 100% price disadvantage and a 1% carbon advantage and expect to win the day.

When we have events like this year’s price tank, the cheaper oil producers will win, every single time. You simply cannot make money at $28/barrel in costs when the prices drop off a cliff.

Some will say oil is necessary, and it will be in demand for decades to come. Even if we’re a small part of the industry, there’s money yet to be made, and we should have our part in that.

IEA, Oil production by region and scenario, 2018-2040, IEA, Paris https://www.iea.org/data-and-statistics/charts/oil-production-by-region-and-scenario-2018-2040

And it’s true—especially if we look at what governments are saying versus what they are doing. But if we want a world that meets the Paris Agreement commitments, it very quickly ceases to matter how much oil is left in Hebron’s reserves. The original reserve will be depleted by 2037 at full production, and anything left after that is likely to be the victim of strong downward pressure on the market.

One of the absolute necessities for our province is the coming-to-grips with climate and its relationship with oil and gas. We can’t bury our heads in the sand, oil- or otherwise.

We all know the Ocean Ranger was lost in a storm the morning after Valentine’s Day, 1982. That event has been memorialized again and again, until it is ingrained in our cultural self-understanding. 

But how often do we include its purpose that night? The rig was out in the storm drilling the exploratory wells for what would become Hibernia. Do we really reflect on the costs, human and otherwise, of this industry? Or do we romanticize them, as we did with the fishery in years past?

And regardless of how we answer, can we really continue to bet our province on an industry that has such marginal benefits and such massive downsides?

Mike Burton is a professional software developer and amateur political observer residing in St. John’s, NL.

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