Canada's newest province got another economic boost Jan. 4 when Exxon Mobil (NYSE:XOM) announced it was proceeding with its Hebron offshore oil field with production expected to begin in 2017. There are a lot of beneficiaries from Hebron. I'll look at what this means to all of the interested parties.
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Estimates peg the recoverable reserves at 707 million barrels of oil. Exxon Mobil will operate the project as well as hold a 36% equity interest. Other partners include the Canadian subsidiaries of Chevron (NYSE:CVX) with 26.7%, Suncor Energy (NYSE:SU) with 22.7%, Statoil (NYSE:STO) with 9.7% and Nalcor Energy (owned by the Newfoundland government) with 4.9%. The field itself is located in 300 feet of water, approximately 200 miles southeast of St. John's, the capital of Newfoundland.
The cost of the project is estimated at $14 billion with daily production of 150,000 barrels of oil. Hypothesizing where oil prices will be in five years is an exercise in futility. They could be through the roof or, more likely, less than the current $90 per barrel due to reduced demand and increased supply. Some estimates put the cost of producing offshore oil at $17 per barrel when the spot price is $50 and $20 when it's $100. Let's split the difference with the spot price in 2017 at $75 per barrel. That would produce an estimated annual operating profit of $3.1 billion. On that basis, Exxon Mobil and its partners should be able to recover their capital costs within five years. At 150,000 barrels per day, it will have 13 years of revenue generation. When you look at it from that perspective, it's easy to see why oil companies require so much capital. It takes numerous Hebrons and Hibernias in order for Exxon Mobil to generate the kind of revenue it does.
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Exxon Mobil's Canadian subsidiary has a 33.125% stake in Hibernia. Since 1997, it's produced 813 million barrels of oil with a commercial value of $51.3 billion. Based on Exxon Mobil's one-third interest, the company's averaged approximately $1.3 billion in revenue (before costs of approximately $18.50 per barrel) annually over the past 13 years. With 582 million barrels of reserves left to produce and being on pace for 50 million barrels in 2012, it should have another 12 years of production from the largest of Newfoundland's four oil projects.
Terra Nova is the second largest oil field in Newfoundland with 419 million barrels of recoverable reserves. Operated by Suncor Energy, it's been producing oil in the Grand Banks since 2002. With the offshore oil field expected to produce 11.3 million barrels of oil in 2012, it suggests the field has another eight to nine years of production left in its recoverable reserves. To date, Terra Nova's averaged $67 per barrel for the 335 million barrels it's produced since 2002. Exxon Mobil's cut is approximately $450 million annually before costs.
Although Exxon Mobil will benefit from the opening of Hebron, Suncor, through its Petro-Canada division, is the only company to have equity in all four of Newfoundland's offshore oil projects. With at least a 20% interest in each, it's had a big part to play in Newfoundland's 65.7% GDP growth between 1997 and 2011. Estimates suggest oil and gas production is responsible for at least 50% of that growth. Newfoundland now accounts for 32% of Canada's production of light and medium crude. Suncor's East Coast operations accounted for 32% of its conventional oil production worldwide in 2011. For every barrel produced, it made $65.89 after subtracting transportation costs, operating costs and royalties. Suncor's share of production in 2011 on the East Coast was 66,000 barrels per day, which translates into $4.3 million (daily) in operating earnings. While it's a significant amount of money, one can't lose sight of the fact that the oil sands are Suncor's most important asset, representing almost 75% of its capital expenditures in 2011.
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The Bottom Line
Some experts estimate that state-owned oil companies such as China's CNOOC (NYSE:CEO), which recently got the go-ahead to buy Canada's Nexen (NYSE:NXY) for $15.1 billion, control 75% of the world's oil production and 90% of its recoverable reserves. It's becoming increasingly difficult for Exxon Mobil and all the other international oil companies to get their hands on conventional and unconventional oil projects because of competition from state-owned enterprises. Therefore, although Hebron will be a small part of Exxon's global revenue, it's vital to its future for the simple reason that Canada is one of the most stable business environments anywhere. The world's largest oil company knows it can count on that production unlike some other regions where it's producing and/or exploring. The same goes for Suncor and Chevron.
Hebron is a big deal for everyone involved, none more so than the province of Newfoundland, which expects to generate $23 billion in royalties, return on investment (ROI) and corporate income taxes from the project. Sixteen years into offshore oil production, the province's economic transformation continues and that's good for all Canadians.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.