Monetizing Labrador Shelf Gas

1
Monetizing Labrador Shelf Gas Group Project

• Master Oil and Gas Studies
• Memorial University
• December 16, 2004

By Lloyd Button Randy Hiscock Penny
Norman Luis Serrano
2
Purpose

• Technical and economic feasibility of
  commercializing stranded gas development offshore
  Labrador

3
World Energy Demand Trends
Demand warrants serious consideration for
Provinces future economic growth
4
Field Locations
5
Geology
Labrador Shelf Stratigraphic Chart
Labrador Shelf Cross-section Hopedale Area
Source CNOPB
6
Resources
Potential Resources
GAS (TCF) Condensate (MMBL)
Potential Resources 18.99 500.1
Discovered 17.2 9.2
Discovered Resources
FIELD Proven Gas (TCF) Proven Condensate (MMBLS)
North Bjarni 2.247 82
Gudrid 924 6
Bjarni 24.3 31
Hopedale 105 2
Snorri 105 2

TOTALS 4,244 123
7
Exploration History
Labrador Shelf Significant Discoveries
8
Methods for Transportation

• Gas gathering and transmission via pipeline.
• Volume reduction (liquefaction (LNG) or
  compression (CNG)) followed by marine
  transportation.
• Conversion to other products by changing from
  methane molecule (GTL) followed by marine
  transportation and
• Conversion to other energy forms such as electric
  power and transmission via subsea cable.

9
Production Volume verses Distance to Market
10
Process Facilities

• CNG is the most viable method of transporting gas
  from Labrador
• The processing and conditioning will depend on
  CNG requirements ( most likely they will have the
  same as pipelines)
• Requirements will depend on the flow rate,
  composition, temperature, and pressure of the
  produced gas and the components/impurities

11
Main Processing Considerations

• Remove water vapor to avoid the hydrate formation
  and corrosion
• Removal of solids
• Removal of gas condensate
• No H2S or CO2
• Heating Required

12
Options Considered

• Floating production storage offloading (FPSO)
  with CNG tankers
• Caisson / Island - CNG tanker and
• Concrete gravity based structure (GBS) - CNG
  shuttle tanker

13
Option 1 FPSO-CNG
Wells Drilled from separate MODU
14
Option 2 Caisson/Island-CNG
15
Option 3 GBS-CNG
16
Economic Analysis Assumptions

• Field Size
• Base Case 2.3 TCF (Bjarni North field)
• High 5.0 TCF
• Low 1.5 TCF
• Price
• Base Case of US 4.30 / MCF
• High US 5.45 / MCF
• Low US 3.20 / MCF.
• Economic sensitivities
• Royalties 5 10,
• CAPEX high and low models
• Exploration risk assumed to be zero
• Operational down time assumed to be the same for
  all three assessed options (100 days/year)

17
Economic Analysis - Results

• FPSO CNG gave most favorable economic based on
• Cashflow
• NPV discounted at 10 15
• ATROR
• GBS-CNG produced marginally more attractive
  economics vs. Caisson/Island-CNG

18
Economic Analysis - Findings

• Only FPSO-CNG is feasible with gas prices of US
  5.00 / MCF or less
• Other options require 4.0 TCF or higher and / or
  the significant higher gas prices

19
Economic Analysis - Sensitivities

1. Development costs (most sensitive)
2. Pricing
3. Reserve Size

20
Results
21
Economic Analysis - Royalty

• Royalty of 5 and 10 had modest sensitivity
  impact
• However, base reserve and price, 5 and 10
  royalty result in marginal to sub-marginal
  economics
• Given political sensitivity with foregoing
  royalty revenue, other revenue methods must be
  considered

22
Other Revenue Sources

• Randy any ideas??
• Confirm higher reserves (exploration)
• Higher Prices likely

23
Benchmarking
Source IHS Energy
24
Fiscal System Benchmarking

• Benchmarked with the following countries
• Netherlands
• Ireland
• Norway
• Trinidad
• Alaska
• Canada Nova Scotia

25
Benchmarking Recommendations(1)

• Pricing tied to NE US price and linkage to price
  of competitor fuels
• No domestic market obligation or export
  restrictions (i.e. lack of infrastructure, small
  dispersed population - no local market)
• Consider State involvement for direct marketing
  of its share

26
Benchmarking Recommendations(2)

• Local content quota, with focus on Labrador
  people, in the issuance for future exploration
  licenses and SDLs.
• Province must be innovative and flexible in
  making new gas legislation to promote
  exploration.
• Gas fiscal terms and tax incentives need to
  balance restricted operating environment with
  accrued economic value

27
Significant Discovery License (SDL)

• Issued by CNOPB
• SDL have no prescribed date for expire
• No economic trigger for operator to move forward
  when market conditions allow
• No requirements for company to periodically
  revisit economics if pricing environment changes

28
SDL - Recommendation

• Requirements should be designed to place onus on
  operators to revisit the economics on a
  bi-annual basis
• The trigger could be when the gas price exceeds a
  specific threshold

29
Market Analysis NE US
30
Justification for NE US Market

• Reserve Size
• Proximity to NE US
• US gas pricing (vs Europe pricing)
• Low local domestic consumption

31
Local Benefits

• The people of Labrador should be the ones who
  benefit most
• Best opportunities in marine transportation
• Particular emphasis should be on training in
  marine sector
• Other opportunities at the offshore facility and
  onshore support

32
Local Labour Content
Overall Project
33
Local Labour Content
Drilling
34
Local Labour Content
Facilities Construction
35
Local Labour Content
Facilities Installation
36
Local Labour Content
Transportation
37
Local Labour Content
Management
38
Local (Labrador) Stakeholders

• The Innu Nation
• The Labrador Inuit Association
• Labrador Métis Nation
• The Newfoundland and Labrador Association of
  Municipalities
• Individual Communities on the south Labrador
  Coast not included above
• Labour Organizations (collective agreements)

39
Adjacency Principle

• People of Labrador should have first chance for
  the competitive supply of labour and services
• Members of the Innu Nation and Labrador Inuit
  Association
• Members of Labrador Métis Nation.
• Other residences of Labrador who are members of
  collective bargaining agencies
• Other residences of the Province of Newfoundland
  and Labrador.

40
Diversity

• In addition to First Nations people, commitment
  to provide fair and equal opportunities should be
  given to
• Women
• People with disabilities
• Other visible minorities

41
Local Contracts

• Onshore base including Port Development and
  infrastructure (buildings, roads, utilities etc)
• Temporary Services for Port Development
• Environmental Monitoring
• Onshore site surveying
• Helicopter Transportation
• Others

42
Corporate Social Responsibility

• Centre for Marine CNG in Harsh Environments
• Co-ordinated Training Plan for Labrador
• Centre for Marine Training
• Quebec/Labrador North St. Lawrence Road
• Scholarships

43
QHSE - Policy

• Protection of workers
• Protection of environment
• Desirable quality
• Modest Profit

44
QHSE

• Design of QHSE Process
• Loss Avoidance vs Max Profits
• Human Element
• Investor/Owners
• Management
• Workforce

45
QHSE System Integration

• Us and Them Gap
• Demonstrative actions (physical behaviour)
• Communications (face to face meetings, focus
  groups, personal written notices, a vehicle for
  bottom up communications as well as top down)
• Consistent reactions to all incidents
• Regular follow-up and closeout
• Safety training and drills

46
Environment Impact - Exploration

• Reported effects in mammals
• Reported effects in fish
• Seismic guns deployment (determine environmental
  effects, horizontal Vs downward)
• Other means of exploration and data acquisition
  are less harmful to environment (electrical
  surveys, gravity, magnetic, satellite, etc.)

47
Environment Impact - Drilling

• Drilling fluids
• Impacts water column and seafloor differently
• Reduce light penetration
• Decrease in sea life
• biological changes in fish larvae
• Technology and advances in drilling fluids can
  reduce impact

48
Environment Impact - Drilling

• Drilling Cuttings
• Impact is proportional to solids discharge
• The fate of the drilling cuttings piles depends
  on thickness, ocean condition, conditions of
  discharge and fluids retention on cuttings
• Estimate1-2 years for initiation of recovery
  after discharge has stopped
• Limits for discharge imposed by law

49
Environment Impact - Production

• Most significant contaminant is the produced
  water
• Produced water is composed of dispersed oil and
  dissolved organic compounds, metals, including
  aromatic compounds, organic acids, phenols,
  inorganic compounds, and also of chemicals added
  in the production/separation line.
• Its chemical composition varies over a wide range
  and depends on attributes of the reservoirs
  geology.
• The produced water and any other discharge are
  closely monitored to minimize adverse effects

50
Environment Impact De-comissioning

• Disposal in deep waters can impact sea life
• May be considered for an artificial reef
• Removal and dismantling of the installation is an
  option

51
Environment Impact Spills

• Operator company must submit contingency plans
  for environmental emergencies to CNOPB
• CNOPB liaisons with environmental advisory
  agencies
• CNOPB helps to design and implement the process
  through which the public may participate in the
  review

52
Conclusion (1)

• 4.3 TCF of gas, potential of 19 TCF
• FPSO CNG option most favorable
• Base reserve and price, 5 and 10 royalty result
  in marginal to sub-marginal economics
• Given political sensitivity with foregoing
  royalty revenue, other revenue methods must be
  considered

53
Conclusion (2)

• Exploration to confirm reserves required
• Gas Clause Required
• Market NE US
• Local Benefits Agreements required, other local
  initiatives that could be taken