Government Rescues Canadian Oil Project
Hibernia creates many jobs; analysts see a money-loser
OTTAWA has ridden to the rescue of Canada's last great frontier oil play. The federal government will write a check for around $300 million (Canadian; US$234 million) to save an oil field only a politician could love.
Hibernia, the oil field in the cold North Atlantic off Newfoundland is either (A) the answer to Canada's long-term energy security and the saviour of the country's poorest province, or (B) a boondoggle that will produce the most expensive oil in the world to solve an oil shortage that existed only in the minds of government planners.
"I am convinced Hibernia is a sound business investment for all Canadians," says John Crosbie, a member of parliament from Newfoundland, and the man most responsible for finding the federal money and putting together the deal that saved Hibernia. Politicians fought to save Hibernia because Newfoundland is a relatively poor economy perched on the edge of a rich country. More than 60 percent of the province's budget comes from transfer payments from the federal government.
It is hard to find an economist outside government who agrees with the politicians, especially at current oil prices.
"Hibernia doesn't make economic sense," says Eleanor Barker, an energy analyst with Sanwa McCarthy Securities in Toronto. "Not in my whole career have I seen anything so politicized." Government finds new partner
The C$5.2 billion oil project almost went under last year when a 25-percent partner, Gulf Canada Resources, pulled out. Politicians from Ottawa and Newfoundland, led by Mr. Crosbie, went looking for a new private partner.
They came up with one, Murphy Oil of El Dorado, Ark., but only after Ottawa guaranteed that it would pay construction costs.
The investors now are Mobil Oil (33 percent), Chevron (27 percent), Petro-Canada (25 percent), and the two new members of the consortium: the Canadian federal government (8.5 percent) and Murphy Oil (6.5 percent).
Government propaganda speaks in superlatives of Hibernia. It is the largest project under way in North America. It will create thousands of jobs, especially in New- foundland but also in the rest of Canada.
"Hibernia will provide leading-edge technological development for Newfoundland," Crosbie says.
The oil is almost 200 miles out in the Atlantic. Giant steel and concrete drilling platforms built onshore will be pulled out to sea. Delivery starts in 1997: 110,000 barrels a day for 18 years, the expected life of the field.
Newfoundlanders have dreamed for more than a decade about an oil find off the coast bringing prosperity and permanent jobs.
Overfishing by local and foreign fleets has closed the cod fishery, once Newfoundland's biggest moneymaker. Handouts from the federal government in the form of special unemployment checks and retraining programs for out-of-work fishermen shore up the economy. Now the oil dream is bumping up against economic realities; nothing is going as planned. Oil prices key
Hibernia has been the victim of falling world prices for oil and, oddly, real estate. The project was conceived in the late 1970s when oil was well above US$30 a barrel. Right now a barrel of oil costs US$18.30. Hibernia's output could cost between US$13.62 and US$24.04 a barrel to produce. The low projection comes from the province of Newfoundland, the high one from pessimistic energy analysts.
The real estate problem is an indirect one. Gulf Canada Resources is more than 70 percent owned by Olympia & York, until recently the world's largest private landlord. Not long after the developer filed for bankruptcy in Canada and Britain, Gulf Canada announced its pull-out from the Hibernia project.
Analyst Barker sees Hibernia as a waste of resources, with private and especially public money committed to produce oil the country doesn't need.
"The project will be financed through foreign bond borrowings," Barker says. "It's silly to take money we don't have and waste it like this."
Ottawa felt it had no choice. Unemployment in Newfoundland is 20 percent, maybe higher. There are few job prospects. And the cost of backing out of Hibernia was probably greater than the investment made by the federal government. Now it hopes it doesn't have to come up with more cash before the oil starts flowing. Higher oil prices - which the Organization of Petroleum Exporting Countries hopes to engineer at its Feb. 13 meeting - wouldn't hurt either.