Canada 150: Hibernia – one billion barrels and counting

This week marks the 20th anniversary of of the birth of the oil industry in Newfoundland and Labrador.

On November 17, 1997, first oil flowed from Hibernia, a gravity-base platform located about 315 kilometres east of St. John’s. In the two decades since, the project has become one of the most prolific fields in Canadian history, reaching the milestone of one billion cumulative barrels in December 2016.

The project is owned by ExxonMobil, Chevron, Suncor Energy, Canada Hibernia Holding Corporation, Murphy Oil and Statoil.

Its success defied many critics in Alberta’s oil and gas heartland, according to Jeff O’Keefe, director of resource management and chief conservation officer with the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB).

“30 years ago, [they] said not one barrel would ever be produced,” O’Keefe told a session in Calgary in 2015.

It wasn’t an easy path from drilling of the first offshore wells in the 1960s to first oil at Hibernia.

Prior to OPEC oil embargo in 1973 and the resulting surge in oil pricing, there was no significant interest in developing costly offshore resources, writes energy policy researcher Leah Fusco in the paper Offshore Oil: An Overview of Development in Newfoundland and Labrador.

The level of interest changed dramatically after prices rose, but it would still be a long road to commercial development.

The provincial government, anticipating that development would eventually occur, established regulations and fiscal terms in 1977. On September 19, 1979 oil began to flow from the Hibernia discovery well, which had been drilled by Chevron four months earlier. According to the Hibernia project, this well was the 45th drilled in the Grand Banks region and the 10th drilled in the Jeanne d’Arc Basin.

But the first delineation well at the Hibernia discovery, drilled in January 1980, was followed more quickly by politics than it was commerical success.

Much as in Alberta at the time, projects offshore Newfoundland and Labrador became stalled by enactment of the the National Energy Program (NEP), in October 1980.

The NEP was put in place by Prime Minister Pierre Trudeau in an effort to give the federal government more of the financial benefits of oil and gas development. It devastated the province of Alberta as well as development in Newfoundland and Labrador.

In 1985, after many years of conflict and legal battles, the NEP was eliminated.

In Atlantic Canada, a joint management system was established for Newfoundland and Labrador’s offshore resources, giving the province benefits as if the oil was located on land – and thus, control of mineral rights.

The federal and provincial governments agreed to establish the C-NLOPB, with a new seven member board comprised of three members chosen by each level of government and a mutually agreed upon chair. All offshore oil development had to be approved by the board.

The path was not yet clear for Hibernia, however. Oil prices plunged in the mid-1980s, leading to members of the consortium threatening to pull out.

By 1990, the provincial government (with help from Ottawa) agreed to give the developers of the project $1 billion in grants and $1.7 billion in loan guarantees in order to help the $5.2 billion project proceed.

The companies agreed to utilize a gravity base strucutre (GBS), which, while more costly than other approaches, would create more jobs. The federal government also agreed to take an 8.5 percent share of the project, after Gulf Canada had pulled out, while Murphy Oil took over another 6.5 percent that had been held by Gulf.

Further delays in the project took place when there were problems encountered with the GBS platform (the province had chosen a local company, with no GBS design experience). By 1993, Norwegian offshore platform design experts were retained and Hibernia finally began production in 1997.

The developers of the project were able to negotiate for a low royalty rate of about one percent, meaning Hibernia would not be particularly lucrative for the province. However, by 2004, the royalty reached five percent.

Hibernia is important to Canada both as an individual project and as the catalyst for an industry that continues to grow. Oil and gas development is now the largest contributor to Newfoundland and Labrador’s gross domestic product, representing 16.7 percent of nominal GDP in 2015, accordin to the C-NLOPB.

There are currently three operating platforms offshore Newfoundland and Labrador: Hibernia, Terra Nova, and White Rose. Later this year first oil is also expected from the new Hebron project.

Hibernia itself is expected to operate until 2047.

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