Canada to Develop $7-Billion Oil Project

Gambling that oil prices will rise, the Canadian government signed a landmark agreement Monday with five oil companies for the $7-billion development of the Hibernia oil field off Newfoundland.

Prime Minister Brian Mulroney flew to St. John’s, Newfoundland, to announce that the federal government will contribute $830 million in grants and up to $1.3 billion in loan guarantees for the giant project.

“This is a day for rejoicing for the people of Newfoundland and Labrador and an important day for all Canadians,” Mulroney said. “Hibernia is by far and away the largest capital investment in the history of Atlantic Canada.”

He said the project could break the cycle of federal dependency in Canada’s poorest province. “It means bringing quality jobs into Newfoundland rather than people moving away from home in search of work,” he said.

But the Conservative prime minister, who is getting ready to call a general election to seek a second term, acknowledged that Hibernia is a gamble. World oil prices now hovering around $15 a barrel need to pass the $20 mark to make the project pay.

“If certainty of results and the elimination of risks had been required in advance, (Canada’s first prime minister) Sir John A. Macdonald would never have proceeded with the great endeavors which bound Canada together,” Mulroney said.

While his faith in the project may win votes in the maritime provinces of the East, Mulroney may face questions in other regions of the country over such a massive expenditure.

Hibernia was discovered in the North Atlantic 185 miles east of St. John’s in 1979. Falling oil prices and years of arguing between the federal and provincial governments over offshore rights led to repeated delays. The political fight was settled in 1985 when Newfoundland won the right to offshore royalties.

It will still be six years before construction is completed, and the project will then have about 20 years of productive life.

The consortium developing the field is led by Mobil Oil Canada Ltd. of Calgary and includes Gulf Canada, Petro-Canada, Chevron Canada Resources Ltd. and Columbia Gas System of Delaware.

The companies demanded concessions from the federal and provincial governments before signing the agreement because it would now cost more to get the oil out of the Atlantic than refineries would receive for it.

Hibernia will create 1,100 permanent jobs over its 20 years of production, and about 1,400 jobs during the construction phase.

Newfoundland Premier Brian Peckford said it will start an economic revival that will give island natives a choice other than poverty or emigration.

The province has an unemployment rate of 17%, the highest in Canada, and its economy is overdependent on dwindling fish stocks around its coast.

As part of the deal, construction of the Hibernia drilling platform will be done entirely in Come-by-Chance, Newfoundland.

The province will waive its 12% sales tax on building materials during the construction phase and reduce it to 4% once Hibernia enters production. Payment of its 16% corporate income tax is open to further negotiation.

The federal government will get 10% of net revenues and estimates a return of $1.9 billion to $3.9 billion over two decades through taxes and royalties.

Newfoundland, a co-signer of the agreement, will phase in royalties starting at 1% and projects revenues of $2.1 billion to $4.2 billion.

Hibernia is estimated to contain at least 525 million barrels of oil and should produce an average 110,000 barrels a day during peak production, about 7% of Canada’s projected demand by the end of the century.

Large-scale development in the Western provinces made Canada self-sufficient in oil and natural gas but land-based reserves are running low, causing companies to look at offshore reserves in the Atlantic and Arctic as well as the tar sands of Alberta.