Cenovus CEO Alex Pourbaix in Calgary on Jan. 30, 2020.Jeff McIntosh/The Canadian Press
An overhaul of Newfoundland and Labrador’s royalty structure means the West White Rose oil field expansion will go ahead, its partners announced Tuesday, ending two years of uncertainty about the half-finished project off the coast of Canada’s most easterly province.
Work will begin to ramp up this year, with the majority of construction set to resume in 2023. The first new oil is expected to flow in early 2026.
Premier Andrew Furey called the announcement a “huge day for Newfoundland and Labrador.”
“When you think of where this industry was and the uncertainty surrounding this particular project just a year ago, we’ve come a long way,” he told reporters in St. John’s.
The White Rose offshore field sits around 350 kilometres east of Newfoundland. It produces about 26,000 barrels per day, but that number is falling as its oil reserves decline. The extension will add about 75,000 barrels per day to production.
Husky Energy Inc., which owned the lion’s share of the expansion project before Cenovus Energy Inc. CVE-T acquired the company last year, hit the brakes on West White Rose in March, 2020, when the COVID-19 pandemic obliterated oil demand and prices.
A few months later, in September, 2020, Husky asked the federal government to step in and help rescue the $2.2-billion drilling expansion. At the time, the company envisaged an arrangement similar to that of the Hibernia offshore rig, in which the federal government acquired an 8.5-per-cent working interest in 1993 after Gulf Canada withdrew from the project.
But what secured the future of West White Rose was an overhaul of the project’s royalty framework, which protects returns for Cenovus when oil prices are low and sends more cash into provincial coffers when crude is flying high.
For Cenovus, the change helped de-risk its investment. For Newfoundland and Labrador, it potentially means a boon for the province’s troubled finances.
“In a high-price environment, we could be up to 42.5 per cent extra royalties on this project,” Mr. Furey said.
“So when we’re all angry that oil companies are making extra money in a high-price environment, Newfoundlanders and Labradorians will now be making more as well.”
While the deal sets a maximum net royalty rate of 30 per cent, it also includes triggers based on the price of Brent crude, a global oil benchmark.
It’s only an extra 1.25 per cent if Brent sits between US$65 and US$75 a barrel, but climbs to 12.5 per cent if oil prices go up past US$90.
According to provincial estimates, revenue remains around $2.7-billion over the life of the project. At US$50 a barrel, that’s reduced by around $850-million. But at US$100 a barrel, revenues increase by about $2.2-billion. Brent traded around US$118 a barrel on Tuesday.
Newfoundland and Labrador will also receive a $200-million royalty abandonment credit from project partners Cenovus, Suncor Energy Inc. and Nalcor Energy, as well as $100-million to establish a Green Transition Fund.
Mr. Furey called the abandonment credit “a win for the province,” saying future generations now won’t have to find hundreds of millions of dollars to clean up the asset when it winds down.
But the restart of West White Rose underscores the struggle between balancing the economy and environment – how to reduce emissions to avoid the worst effects of climate change, while also giving provinces much-needed revenues.
Newfoundland and Labrador has its own goal to bring emissions to net zero by 2050. But critics say there’s no way that can happen, nor can Canada meet its own climate targets, by increasing fossil-fuel production.
Mr. Furey, however, is adamant oil from his province can straddle the divide, because its oil extraction is far less emissions-intensive than Alberta’s oil sands, and it’s not landlocked, so crude can be transported straight to market.
The global energy transition, he said, means “holding two thoughts in your head at once.”
“You’re moving from one place to somewhere else. That’s not going to happen overnight, and we have the product that the world needs right now,” he said.
“So from our perspective, this is the project that should be developed.”
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