How deep water development could transform Newfoundland and Labrador’s offshore oil sector

How deep water development could transform Newfoundland and Labrador’s offshore oil sector
Equinor plans to use a floating production, storage and offloading vessel at its Bay du Nord discovery. Image courtesy Equinor Canada

Equinor is poised to go where no developer has gone before with the Bay du Nord discovery

BREAKING NEW GROUND in Newfoundland and Labrador’s offshore doesn’t seem to bother Unni Fjaer.

Equinor’s top executive in Atlantic Canada (her official title is vice-president, offshore Newfoundland) says even though developing its Bay du Nord discovery in the remote Flemish Pass Basin means it will be operating farther offshore and in deeper water than any company ever has in the province, the Norwegian-based multinational is up to the task.

“We have experience operating in the deep waters,” Fjaer says. “For the time being Bay du Nord is approximately at 1,200 metres of water depth. That’s quite deep. But it’s not a new depth for us to operate in.”

The company hasn’t made a final investment decision on Bay du Nord, which is estimated to hold approximately 300 million barrels of oil. But in late July 2018 it took a significant step in that direction when a development agreement was announced between Equinor and the Newfoundland and Labrador government. The agreement sets out how much spending and work on Bay du Nord will be done in the province, the ownership stake the government will take in the oil field, and other benefits the development will provide.

Equinor says it expects to decide on Bay du Nord by 2020. The company holds a 65 per cent interest in the discovery and Husky Energy Inc. a 35 per cent interest. Nalcor Oil and Gas, a division of Crown corporation Nalcor Energy, will acquire a 10 per cent piece of Bay du Nord.

If Equinor decides to develop the field, first oil is expected by 2025. However, Fjaer says the agreement does not mean the company has given Bay du Nord the green light. “The agreement provides the commercial terms for our project. It gives much more clarity on the business case side of it,” she says. “But it’s not the answer to everything. We still need to work hard to get the project as good as it can get.”

As good as it can get likely means bringing down costs of a project that, if built, would be the furthest offshore in the world. In 2016 Statoil Canada president Paul Fulton (the company officially changed its name to Equinor in May of 2018) told attendees at an oil and gas conference in St. John’s that the company couldn’t have projects that broke even at US$80-$90 per barrel anymore. In 2017 he told Natural Resources Magazine Bay du Nord was not “competitive yet” in its portfolio.

But since Fulton’s comments, Equinor has filed a project description with the Canadian Environmental Assessment Agency and signed the development agreement with the Newfoundland and Labrador government. The government estimates Bay du Nord would break even with crude oil trading at US$49 per barrel. As this magazine went to press, the price of the Brent crude blend Newfoundland oil trades at on global markets was at US$85 per barrel. The economics for Bay du Nord has improved greatly since Fulton’s comments in 2017.

And as Fjaer pointed out, Equinor’s ace in the hole is it is comfortable operating in deep water. In April of 2018, the company towed a platform to its Aasta Hanseen natural gas field. The field is 300 kilometres offshore and in 1,300 metres of water in the Norwegian Sea. Fjaer’s logic is that if Equinor can operate successfully at Aasta Hanseen, it can do the same at Bay du Nord.

The project description filed by Equinor to CEAA says it will use a floating production and storage vessel and it may involve the drilling of 10-30 wells to achieve average daily production rates that would range from 94,000 to 188,000 bpd during the life of the field, which is currently pegged at 12-20 years. Its life could be extended to 30 years if additional discoveries are made that could be tied back to the vessel. The project description says the FPSO will be large enough to store a maximum of 900,000-1 million barrels of crude.

Getting Bay du Nord to the stage where it’s pumping out oil by 2025 is going to result in a surge of economic activity for a province that has struggled with huge deficits since 2016 as an oil and gas downturn torpedoed global oil prices and reduced offshore spending in the region. The estimated cost of pre-development and development of the oil field is $6.8 billion. Through the framework agreement, $3.8 billion of that total will be spent in the province and 84 per cent of employment in the project will come from Newfoundland and Labrador. Other big-ticket items in the agreement that Equinor has agreed to include establishing an integrated operations centre for Bay du Nord in the province and investing $75 million in research and development to position the province as a deep-water centre for excellence focusing on subsea technology, digitalization, renewable energy solutions and ocean innovation.

“This is the first step into a new frontier for the province’s oil and gas industry―deep-water production,” said Newfoundland and Labrador Premier Dwight Ball while visiting Placentia this fall.

Politicians are prone to playing up the importance of any positive bit of economic news. But Memorial University economics professor Rob Greenwood says the impact of Equinor extracting crude oil from the Flemish Pass in water depths of 1,200 metres goes beyond the project itself. That’s particularly true with Atlantic Canada having been chosen as the location for an ocean supercluster by the federal government, which the oil and gas sector is a partner in.

“This is bigger than Bay du Nord. Designing offshore structures that can withstand the swells and waves and wind and ice, there can be a cross-sector learning,” Greenwood says. “There will be people looking at aquaculture farther offshore and they can learn a lot from the oil and gas industry.”

Industry experts also see Bay du Nord as a springboard to more sustained activity in Newfoundland and Labrador’s offshore than has been seen in the past. The Jeanne d’Arc Basin is where the province’s four producing fields―Hibernia, Terra Nova, White Rose and Hebron―are located and that’s where the lion’s share of drilling and activity has taken place. But a fifth oil field in another basin can open new possibilities and opportunities for the sector and the companies that work in it.

“It’s into deeper water and some of the technologies are different while the operational aspects are more challenging,” says Bill Fanning, president and country manager for Kvaerner Canada Ltd. “The first development in a new basin is unique and sets the scene in a number of different areas. My hope as an industry person is that there is a lot of collaboration and discussion happening between the operators to share lessons learned and opportunities for improvement, so we can make any subsequent development attractive.”

Fanning’s 30-plus year career in the oil and gas industry has seen him witness the beginning of the province’s oil age to what it is today. He was a leading figure in the development of Hibernia, the province’s first producing oil field, as a member of the project’s management team. Hibernia was completed on time and on budget in 1997. It produced its one billionth barrel of oil in December of 2016.

Of course, a basin must yield discoveries before any production can happen. But if significant amounts of oil are found, once one field is pumping out oil, other developments usually follow. The success of ExxonMobil’s Hibernia provided a blueprint for how Suncor Energy Inc. would proceed with its Terra Nova field and how Husky Energy would exploit White Rose.

Both Fanning and Greenwood see the industry’s move into deeper, more remote corners of the North Atlantic as inevitably leading to innovation and expertise that can be exported beyond Newfoundland and Labrador’s borders. “If you look at areas around ice management and surveillance, weather forecasting and remote sensing, anything that is tied to the physical environment, over the last 20 years we’ve developed worldclass expertise,” Fanning says. “Even today a lot of that expertise that exists in the industry is continuously improved through research and development or collaboration. I have every expectation we should be the primary drivers of that and achieve a level of competence in our own backyard that improves safety and reliability and are in demand globally.”

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