Economy 1997 - Oil and Gas

Increased investor confidence in the Province's oil and gas sector spurred industry activity in 1996 and facilitated industry players proceeding with a number of new project developments and exploration activities. Previous estimates of production levels are no longer speculative but have become a near certainty. Indeed, by the year 2000 the Province may have two fields in production with combined production of 225,000 barrels of light crude oil per day.

Construction of the Hibernia project is virtually complete with only the Offshore Loading System and Pipelines to finish, which is scheduled for completion this summer. The Gravity Base Structure and the topsides have been mated and the next stage of the project will be the tow out to the field in June 1997. Expenditures for the project to the end of 1996 totalled $5.2 billion with Newfoundland content estimated at 46 percent. Employment averaged 4,400 in 1996 compared to 5,500 in 1995: Provincial employment for 1997 will decline to approximately 1,200 person years and stabilize to a sustainable level of 600-700 by year end. Once in production, the estimated life span of the Hibernia field is approximately 20 years although new technologies could extend the life of the field.

Petro-Canada and partners are proceeding with the development of the Terra Nova field. An agreement governing royalties, tax and benefits is now in place. A federal/provincial environmental assessment is proceeding and a Development Plan Application has been submitted to the Canada-Newfoundland Offshore Petroleum Board (CNOPB). The Grand Banks Alliance has been selected to undertake the design and construction of a floating monohull production unit.

Development drilling is scheduled for the second quarter of 1998 and construction of a production system will start in the third quarter of 1998; the target for first oil production is the end of 1999. Estimated capital and operating costs are $4.2 billion and operations will provide about 400 - 500 long term jobs. The project will yield higher royalties for the Province than the Hibernia project due to lower project costs and a more favourable royalty regime. The Terra Nova field, discovered in 1984, is located about 35 kilometres southeast of the Hibernia field with an estimated 400 million barrels of recoverable reserves and an estimated life span of 15-20 years.

Exploration activities offshore are expected to increase as investors indicate renewed interest. Husky Oil has confirmed its interest in developing the Whiterose field and will proceed with some seismic work in 1997 and extended well testing in 1998 and 1999. If the results of this work are encouraging, a permanent production system could be in place by 2004 or earlier. The Whiterose field is estimated by Husky Oil to contain 250 million barrels of recoverable oil. Amoco will drill one well in 1997 as part of their $90 million exploration expenditure bid made in 1995 against a land parcel near the Terra Nova field.

In the fall of 1996 the CNOPB issued a Call for Bids on eight parcels of offshore lands (four parcels are in waters close to Hibernia and four are on the West Coast) totalling 900,000 hectares. This was one of the largest offshore land offerings since the mid-1980's and the response was positive: bids were received for all parcels and significant work expenditure bids were committed on three parcels, the highest being approximately $65 million which is the second largest expenditure commitment ever received for offshore exploration work. The largest bid received, as referenced earlier, was made by Amoco.

Exploration for West Coast oil reserves is occurring both onshore and offshore. Although moderate, onshore activities were at their highest level ever in the winter of 1996 and provided opportunities for local employment and the provision of goods and services. Four wells were drilled during 1995-96, of which one was an onshore well, two were drilled onshore-to-offshore and one was drilled offshore. The onshore well, Hunt/PanCanadian Port au Port #1, is confirmed as having encountered oil but details have not yet been released: the remaining wells were abandoned. Nevertheless, Hunt and its partners have demonstrated continued interest in the area by acquiring more land and carrying out further exploration.

GENERIC ROYALTY REGIME

In June 1996 the Provincial Government announced the details of a generic royalty regime to be applied against all future offshore oil development projects (Hibernia and Terra Nova projects were negotiated under separate agreements). The regime has been well received by industry and is considered to make oil development opportunities in the Province's offshore competitive with other world exploration development opportunities. The regime takes into account the particular challenges, costs and risks associated with "frontier" exploration as well as the challenges presented in the North Atlantic. The structure of the regime is also sensitive to both the need for developers to realize profits on their investments and the Province's right to realize maximum gains from the development of its resources.

Advances in technology continue to increase the viability of East Coast drilling, notably smaller pockets of reserves, and reduce the overall financial risks. Husky Oil has predicted that, relative to market estimates for the cost of future light crude supplies, the development of light crude oil from Newfoundland's east coast will become increasingly cost competitive. The Company has stated its belief that the development of Whiterose could follow on the heels of Terra Nova and thereafter, additional fields could be identified. Combined, total production could be pushed upwards to 450,000 barrels per day by 2006 and beyond.

Optimism concerning the hydrocarbon potential on the Province's West Coast continues as four new exploration licences were issued for the area in 1996 with $600,000 pledged in work expenditures. Inglewood Resources Inc. recently initiated a seismic program in the Deer Lake area as part of its farm-in agreement with Vinland Petroleum. Inglewood has indicated that it may drill up to two wells in this area. Canadian Frontier Resources Inc. recently completed its seismic work in the Glenburnie area. As well, Delpet Resources, as part of an agreement with Vinland Petroleum, will drill one hole north of Roddickton.