Drilling contract seen as an N.L. oil industry win following a series of pandemic setbacks

The province's oil and gas association is heralding a new drilling contract in the Flemish Pass as a rare victory for the struggling Newfoundland and Labrador offshore oil industry.

CNOOC Petroleum North America is set to create a single exploration well in the area next spring.

"It is certainly positive news for our industry and for the supply and service sector that Noia represents," said Charlene Johnson, chief executive officer of the Newfoundland and Labrador Oil and Gas Industries Association.

The Chinese company has contracted U.K.-based Stena Drilling to drill the Pelles A-71 well, with work starting between April and June 2021, and lasting for some 90 days.

The company will use the Stena Forth, a harsh-environment drill ship capable of drilling in water depths up to 3,000 metres. The campaign will create roughly 370 direct and indirect jobs, said Johnson, and inject tens of millions into the province's economy.

It's the latest step in efforts to expand oil production beyond the four producing fields in the Jeanne d'Arc Basin.

But it's the only exploration activity planned for next year, despite some $4 billion in exploration commitments having been made by oil companies in recent years.

The global pandemic has threatened that activity, and industry boosters hope CNOOC's continued confidence in the offshore will motivate other oil majors to take similar action.

"We would love to see more than one well being drilled next year," said Johnson.

Big hopes for exploration incentives 

Johnson hopes a program announced by the provincial government last month will encourage companies like CNOOC, BP and others to drill more wells in frontier areas like the Flemish Pass and the Orphan Basin in their quest to find the next big discovery.

The province has promised to provide cash to companies to help defer the cost of an exploration well, which can cost up to $100 million each.

The money will come from down payments made by companies on exploration projects that have been defaulted because the work was not done in a specified period of time, typically six years.

A company must hand over a 25 per cent down payment on work commitments to the offshore petroleum board when it is awarded exploration rights on a land parcel. As such, the board is now holding roughly $1 billion in cash from oil giants like ExxonMobil and BP.

Under this new program, if companies forfeit that cash, the province will use it to entice other companies to drill wells.

It's conceivable that up to $46 million in security payments could become available next year alone, with that figure steadily increasing in future years.

The province is still working out the details of how companies can access these funds, and no approvals have yet been made.

In a statement to CBC News, an official with the Department of Industry, Energy and Technology said CNOOC is "very interested" in the program.

Johnson hopes the program will be the incentive needed for CNOOC to do a second or even a third exploration well next year. 

But she said it's vital for the province to reveal the program parameters as soon as possible so companies can have some certainty.

"That may have an impact in terms of influencing the number of wells next year if it's attractive enough," she said.

CNOOC committed to 'sustainable success' in N.L.

CNOOC has a 100 per cent working interest in two exploration licences, and has described the area it plans to explore as "world-class" with a "large hydrocarbon potential."

The company has already acquired 3D seismic information on the area it plans to drill, and has said it aims to "build long-term, sustainable success in the region."

CNOOC had planned to drill what's known in the business as a "wildcat" well this past spring and summer in the same area, using the Stena IceMax at a reported daily fee of $299,000.

But that campaign was shelved because of the pandemic.

It was one of a long list of setbacks that have rocked the oil industry this year.

With oil prices cratering this past spring because of a combination of the pandemic and an oil price war between Russia and Saudi Arabia, oil companies began slashing spending.

Drilling on the Hibernia platform and work on a series of extension tiebacks have been suspended, a long-planned life extension project for the Terra Nova floating production, storage and offloading vessel is under review, Equinor's Bay du Nord development has been deferred, and the West White Rose extension project is stalled at roughly 60 per cent completion.

As a result, the industry has been shedding jobs in large numbers, and the supply and service sector is reeling, said Johnson.

• Chinese oil company announces delay of Flemish Pass drilling campaign

With climate changes worries as a backdrop, there's widespread agreement that the transition away from hydrocarbons will occur in the coming decades in order to reduce greenhouse gas emissions.

That's why it's important that exploration drilling is intensified, said Johnson, so the province and its citizens can benefit from the resource before it's too late.

The sooner new discoveries are made, she said, the sooner construction on new oil producing platforms would commence.

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