Talks to save Terra Nova oilfield collapse after N.L. government rules out equity stake

Talks aimed at saving the Terra Nova oilfield in Newfoundland and Labrador's offshore have broken down, according to Energy Minister Andrew Parsons, with the provincial government rejecting a request from the oil companies involved to purchase an equity stake in the troubled project.

It's not clear what this means to the future of the oilfield, but sources say it's now up to the oil companies to find a way forward without relying on the province as a business partner.

Parsons told reporters Thursday that despite "significant efforts on the part of all parties" and a "significant financial offer" from the province, the future of the project remains uncertain. 

CBC News, through sources, has learned that the lead partner and operator for the field, Calgary-based Suncor Energy, asked the provincial government to take a 15 per cent ownership stake in Terra Nova.

Sources say the province felt the risks were too high, and that it had already offered significant support in the form of grants and royalty relief.

"While the provincial government has and had discussed terms on taking an equity stake in the project, the risk has proven to be too great for a project which is so late in its life," Parsons said.

Government offers $205M in cash

In a bid to save the project, the provincial government offered the oil companies $175 million in cash from an oil industry recovery fund created with federal money, and a break on royalty payments to the governments.

Parsons said the province then upped its offer to $205 million.  

Those incentives, according to Parsons, added up to nearly half a billion dollars, and would kick in only if the companies agreed to a long-term plan to resume production.

The offer has not been accepted by the project's owners, Parsons said, but it's still on the table. 

"Our government is and continues to be supportive of the province's oil and gas industry and the Terra Nova project as demonstrated by this significant offer that's on the table," he said. 

"However, we as a government and a province have a duty to all residents. Given our fiscal situations we cannot support this project at all costs." 

Dave Mercer, president of Unifor Local 2121, which represents workers on the Terra Nova project, told CBC News he questions the province's investment proposal, since most of the money comes from federal funding.

"The rest is the royalty regime, which should not be a factor in this," he said in an emailed statement that said the government has "helped cripple any chance of hundreds of workers going back to work in this province," Mercer said in a statement.

Mercer said hundreds of workers are scrambling to figure out a way to provide for their families. 

The Newfoundland and Labrador Oil and Gas Industries Association, known as Noia, also fears for the workers, their families and the loss of spin off benefits if the project is axed. 

Noia CEO Charlene Johnson said in statement she encourages all parties to continue to find a resolution and noted that in January it appeared a deal might be struck. 

"We must get back to that place," Johnson said. "This project has provided billions of dollars in revenue to both the operating partners and governments, and I do not believe anyone can or should simply walk away."

Noia said it has commissioned a study to examine the economic impacts of the Terra Nova life extension program, the results of which will be released in the coming days.

Four companies leaving the project

Nearly 1,000 jobs were linked to the field at the end of 2019, which is the last time oil was produced by the Terra Nova FPSO, an aging floating production, storage and offloading vessel that is now docked in Bull Arm, Trinity Bay.

Parsons said the provincial government understands the negative impacts, such as job and royalty loss, if the project shuts down but had to balance those against the financial risk to taxpayers.

"I know there's going to be blowback and I expect it. I wouldn't expect otherwise from the groups that are directly affected by this," he said.

"But we cannot make bad decisions. We're trying to reduce bad decisions, and we feel that in this case this is the best decision right now and again I am hopeful that these owners will take the money that's been offered to them and they will bridge the gap." 

It's been confirmed that four of the seven original partners in the field — ExxonMobil Canada, Equinor, Mosbacher and Chevron — are departing the project. Combined, the four companies own 40 per cent of the shares in Terra Nova.

Sources say Suncor and Husky Energy, a subsidiary of Cenovus Energy, were willing to increase their ownership interests in the field, but would not commit to filling the gap left by the four departing companies.

An estimated $600 million is required to carry out an upgrade of the FPSO and subsea infrastructure, and a 15 per cent share of that would cost the province $90 million. The province would also be on the hook for 15 per cent of abandonment costs after a decade of additional production, with some estimates putting the total abandonment costs as high as $1 billion.

Sources say the risk of cost overruns on the asset life extension, the possibility of an early end to production, market volatility, and the cost of abandonment were risks the province could not take. More than 85 per cent of the oil reserves for the Terra Nova project has already been recovered, said Parsons.

"Unlike current project owners, taking on an equity stake as a new partner involves significant risk to the provincial government. The current project owners are already committed to abandonment costs at a future date," he said. "The provincial government as a new equity owner would be committing to costs in the hundreds of millions of dollars without any guarantee of a return."

The release last month of "The Big Reset," the final report of the premier's economic recovery team, also influenced decision-makers, sources say. Committee head Moya Greene recommended the province sell its equity stakes in three existing offshore projects because they are "not a core function of government."

The report also says "a small province such as Newfoundland and Labrador should not be an owner of oil production facilities."

Suncor is a partner in all four mature oilfields in Newfoundland's offshore, and reported a gros profit of more than $250 million on those investments in the first quarter of 2021. 

The Terra Nova field began producing oil in 2002. As of the end of 2020, recoverable reserves in the field were estimated at 81 million barrels.

"I'm calling on project owners to continue to work to find an equity solution. These companies have significantly more financial resources available to them than the provincial government," Parsons said. 

A statement from Suncor says the company is surprised and disappointed by the provincial government's decision.

"While Suncor is supportive of asset life extension and a safe and reliable return to operations, to date, there has not been alignment among all the owners to support a long-term production plan for the asset and unfortunately abandonment remains a real possibility at this time," the statement reads. "We're hoping other owners wanting to exit the project will reconsider."

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