NEWFOUNDLAND AND THE OFFSHORE OIL INDUSTRY 1963 - 1995

by Mark Shrimpton and Keith Storey

The first permits to explore the Newfoundland offshore for hydrocarbons were issued by the Government of Canada in 1963. This sparked a conflict which was to bedevil intergovernmental and industry/government relations for more than two decades, with both the Canadian and Newfoundland governments claiming jurisdiction over the continental shelf, an issue complicated by Newfoundland’s late (1949) entry to the Canadian Confederation and the impacts of the extension of territorial waters to 200 miles. However until 1979 this was, for most Newfoundlanders, an arcane jurisdictional dispute about an obscure and largely invisible industry.

Early Exploration

The first well was drilled in 1966 under both federal and provincial permits, and such duplication of regulation continued until 1985. The 1960s and 1970s saw drilling off Labrador, the Northeast Coast, the South Coast and on the Grand Banks, but the pace of exploration was slow because of the often extreme weather and sea conditions, and the seasonal presence of icebergs. Only the Labrador drilling produced significant early discoveries; however, the remoteness of these gas fields made them uncommercial and no wells have been drilled off Labrador since 1982.

Until the late 1970s exploration took place under a generally permissive regulatory environment; both governments sought only to encourage drilling while trying to ensure that basic environmental, safety and other concerns were addressed. Most work was undertaken by foreign vessels and crew, and there were limited local economic benefits or other impacts. However, with the 1976 appointment of Brian Peckford as Minister of Mines and Energy (and, later, Premier), the approach changed. He and a group of fellow ‘young turks’ saw the need for new economic development strategies, and were much influenced by Norwegian approaches to the management of offshore oil activity.

Newfoundland, with its often harsh climate and glaciated terrain, distant from the economic heartlands of Europe and North America, had long suffered from severe economic problems. Increasingly desperate attempts at economic development during the early twentieth century could not prevent the Dominion of Newfoundland (self-governing since 1855) from going bankrupt in 1932. Attempts to address the economic problems continued during a period of non-democratic rule from Westminster (1932 to 1949), and by use of a range of federal regional development and other programs, after Confederation with Canada. However, unemployment and associated social problems were still the main political issues in the 1970s and continue to be so to this day, exacerbated by fisheries moratoria caused by a collapse of the groundfish stocks.1

Peckford’s new approaches to economic development and resource management resulted in the 1977 revision of regulations under the provincial Act Respecting Petroleum and Natural Gas. They represented a much more interventionist approach to managing the industry, placing considerable emphasis on the optimization of the socio-economic and bio-physical impacts of oil activity. The former included regulations to ensure that business and employment benefits accrued to Newfoundland, making a direct contribution to reducing the problems of the economy and indirectly serving to develop a new industrial sector.2

These regulations were effective; local companies expanding into supply boat operations, light fabrication and other activities, and by 1981 Newfoundland residents comprised 57% of the 1,630 person offshore labour force. However, this was not without its costs; eighty-four crew, mostly Newfoundlanders, died when the Ocean Ranger drilling rig sank in February 1982, and local companies suffered severe problems associated with fluctuations in exploration and particularly its decline after 1985.

While the industry’s negative response to the provincial regulations resulted in immediate reductions in activity, exploration soon flourished again as a result of increased energy prices, federal frontier drilling incentives and positive results, including the September 1979 Hibernia discovery. The Hibernia P-15 well was drilled in 80 m of water by Chevron Canada for Mobil Oil Canada. Located 315 km east southeast of St. John’s (the province’s capital and largest city, with current metropolitan area population of approximately 165,000, and the nearest harbour and airport to the field), it was the 60th well drilled in the Newfoundland offshore. It flowed large volumes of sweet light crude with initial estimates that it contained over a billion barrels of oil.

Developing Hibernia

The Hibernia discovery generated considerable public interest and excitement, ‘fact-finding’ trips to Scotland and Norway by representatives of government, industry, public interest groups and the media, a flurry of speculative activity and associated increases in land, housing, office and other prices. All of these led to an increase in concern about the possible socio-economic and bio-physical impacts of the industry. The Hibernia find also intensified attempts to settle the jurisdictional dispute.

These were unsuccessful, and it was not until 1984 that the legal dispute was resolved when the Supreme Court of Canada ruled that the Newfoundland offshore fell under federal jurisdiction. However, the federal Progressive Conservative opposition party had committed itself, if elected, to recognizing the ‘right of Newfoundland and Labrador to be the principal beneficiary of the wealth of oil and gas off its shores.’ They were subsequently elected and, in February 1985, the dispute was formally ended with the signing of the Atlantic Accord. This provided for, among other things: joint management of the offshore; most revenues going to the province; a development fund to aid Newfoundland’s involvement in the industry; and, first consideration being given to Newfoundland companies and residents when it came to business, employment and training opportunities.

In the interim, delineation drilling showed the Hibernia reservoir to be highly fractured, reducing the estimated reserves to between 525 and 650 million barrels, and Mobil and its partners decided to use a huge concrete platform to produce the field. While generally similar to North Sea platforms, the chosen design has a barrel-shaped storage tank which extends above the surface of the sea and is protected by a serrated icewall, which should withstand any icebergs that can reach the platform.3 A floating system would have been cheaper but less able to sustain production in the face of the climate and icebergs, while a concrete platform, which would have to be largely built in Newfoundland, also promised significant local economic benefits.

The consortium also decided to use shuttle tankers to transport the oil to market; pipeline transportation would have been expensive and vulnerable to seabed scour by icebergs. As with all aspects of the production and transportation system design, there were concerns about the safety and pollution, especially given the distance from shore and the fact that there are currently no other platforms in the area. The proponents sought to address these issues by proposing the adoption of state-of-the-art risk assessment and loss-prevention approaches and techniques. In the case of pollution concerns, these were lessened by the fact that the prevailing currents and weather systems would carry any spills out into the North Atlantic.

This design received government approval in 1986, but there was still need for a development agreement, spelling out financial and taxation commitments, between Mobil, its partners, and the federal and provincial governments. The final agreement was not signed until September 1990, but major contracts were immediately awarded for construction of the concrete gravity base (by a Canadian/French/British consortium) and the topsides (by a Canadian/Norwegian group) for the platform.

Development of the platform construction yard started in late 1990. The yard, built at a greenfield site 140 km west of St. John’s at Mosquito Cove, Bull Arm, Trinity Bay, is the location for the construction of the concrete base and one topsides module4, the assembly of the topsides, and the final mating of the base and topsides structures. It was planned that the site would have a peak labour force 3,600 workers, and a self-sufficient 3,000-person workcamp was built to minimize the housing and other social impacts on local communities. Subsequent design and scheduling changes increased the labour requirement and led to the expansion of the camp to accommodate another 500 workers.

Tow-out of the platform to the field was originally scheduled for 1995; however, in early 1992, financially-troubled Gulf Canada Resources withdrew from the consortium. There was a reduction in activity, a delay in project completion and the possibility that it would be mothballed if a new partner was not found. A new agreement was not reached until early 1993 when two of the original partners agreed to take an additional share, with the rest going to two new partners, Murphy Oil and the Government of Canada. The last was the first equity involvement by the federal government.

In addition to the Mosquito Cove activity, work in Newfoundland has been focused in the St. John’s area, which has seen fabrication, engineering and administrative work and will provide the supply base for offshore installation and production. The latter includes the drilling of over eighty development wells. Fabrication and engineering work has also taken place at Marystown, a regional service and fisheries centre on the Burin Peninsula, where government grants had helped develop an offshore fabrication complex. A few smaller contracts have been awarded to companies operating elsewhere in the province.

After tow-out, the construction yard will be handed over to the provincial government for use, it hopes, for further offshore projects. It is now planned that Hibernia production will start in late 1997 and last at least 18 years (although there is potential for further production from the field and for using the platform in developing other fields). As such, it will have been 31 years since the first offshore drilling, and 18 years since the initial Hibernia discovery, before ‘first oil’ and the start of commercial production.

Other Projects

While Hibernia is the largest field yet discovered, early 1980s exploration resulted in a total of twenty significant finds5. Most are on the Grand Banks, and the latest estimate is that there are about 4.7 billion barrels of recoverable oil in that region. The Terra Nova field, located some 30 km southeast of Hibernia, is the largest and closest to development. Petro-Canada have not yet formally indicated that they wish to develop it, but an application may be filed with the government in late 1995. The company wants to use a floating production system, but while the province would like to see any system built at Mosquito Cove, this seems unlikely given a federal refusal to provide further major financial support to Newfoundland offshore oil projects.

There has also been renewed interest in Western Newfoundland, where onshore oil seeps led to exploratory drilling as early as 1867. Recent drilling by Hunt Oil, using an onshore rig to explore a structure which extends out under the Gulf of St. Lawrence, has apparently produced very positive results and various companies have committed to further onshore and offshore drilling. Even in the latter case, the shallow and ice-free waters mean that the costs of exploration and any production will be modest when compared with Grand Banks activity.

Conclusion

The impacts of the offshore oil industry on Newfoundland to date have generally been beneficial, and this seems likely to continue to be the case. Hibernia is currently the largest construction project in North America. Employment at the Mosquito Cove site will peak in August 1995, at about 5,500 workers, including some project-related in-migrants from Norway, France and mainland Canada. The total employment in Newfoundland has been more than 3,000 since September 1993 and more than 4,000 since March 1994, and is expected to peak, in the Fall of 1995, at over 6,000. These are very significant figures in a province which officially has about 40,000 unemployed and unofficially has even more.

While much of this has been conventional construction, services and administrative work, a significant amount has been specialist and technologically-advanced. For example, 227,000 person-days of design engineering work have been completed in Newfoundland. This has involved hiring new and training existing personnel, increasing the skills and capabilities within local companies. Recent case studies of Newfoundlanders who have worked on the Hibernia project show that they feel that they have benefitted greatly, developing technical skills and capabilities, having day-to-day hands-on experience with a major project and making new professional contacts and links. Work on Hibernia and other projects have more generally expanded and diversified local business capabilities, with Newfoundland companies building on their oil-related experience and expertise to sell to the industry elsewhere.

Early concerns about negative socio-economic and bio-physical impacts of oil activity have proved to be overstated, and/or have been largely mitigated. More moderate expectations described in the mid-1980s Hibernia impact assessment have proven to be generally accurate. The projected impacts of the construction site on housing, services and infrastructure, based on the establishment of the workcamp, were very modest and forecast to be within the capacities of the affected communities to accommodate them. While subsequent socio-economic monitoring has been limited, there is no evidence that the project has had any impacts which are significantly different from those predicted. There have, similarly, been only modest and generally beneficial effects in St. John’s and Marystown.

Assuming the present pattern of events is maintained, Hibernia will be remembered as a major resource development project in which potential impacts were adequately identified, optimization measures determined and implemented, and the negative consequences avoided or mitigated. There will always be questions as to whether its positive benefits have been maximized (it certainly seems unlikely that Hibernia will generate significant resource revenues), and at what cost, but the benefits have been substantial, including development of the base for what promises to be a new industrial sector for Newfoundland and Labrador. Hopefully, Terra Nova and other projects will reinforce and build on these developments, as well as generate greater resource revenues.

1. The provincial unemployment rate is currently over 20%, with much higher rates in many rural areas. Out-migration is common, average incomes low, tax rates high, and half of provincial government revenues come from federal transfers.
2. The provincial regulations helped prompt the Government of Canada to introduce a similarly interventionist National Energy Program. Enacted in 1981, it encouraged Canadian ownership and drilling in frontier regions, promoted Canadian business and employment opportunities and strengthened protection of the socio-economic and bio-physical environment.
3. Larger bergs are carried south by the Labrador Current but cannot reach the relatively shallow location of the platform.
4. The other topsides modules are being built in Italy and South Korea, reflecting the international nature of the offshore oil fabrication industry.
5. To date, expenditures on seismic, drilling and other pre-development work have totalled approximately C$3.8 billion.