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1
Monetizing Labrador Shelf Gas – Group Project
Master Oil and Gas StudiesMemorial UniversityDecember 16, 2004
By: Lloyd ButtonRandy HiscockPenny NormanLuis Serrano
2
Purpose
Technical and economic feasibility of commercializing stranded gas development offshore Labrador
3
World Energy Demand Trends
Demand warrants serious consideration for Province’s future economic growth
4
Field Locations
Atlantic Ocean
Quebec
NewBrunswick
Nova Scotia
Labrador
Newfoundland
CANADA
P. E. I.
USA
LABRADOR SHELF
HOPEDALE BASIN
HAWKE BASIN
ST. ANTHONYBASIN
EAST NEWFOUNDLANDBASIN(ORPHAN BASIN)
FLEMISHPASS
CARSON BASIN
JEANNE D'ARC BASIN
HORSESHOE BASIN
WHALE BASIN
NOVA SCOTIABASIN
SYDNEYBASIN
ANTICOSTI BASIN
NOVA SCOTIA SHELF
FUNDYBASIN
FRANKLINBASIN
GEORGES BANKBASIN
MAGDALENBASIN
APPALACH IAN ST R
UC
TUR
AL
FRONT
Landward edge of Mesozoic-
Cenozoic sediments
70°W
70°W
60°W
60°W
50°W
50°W
40°N
40°N
50°N
50°N
0 250 500Km
5
Geology
AGE LEGENDFORMATIONS
TE
RT
IAR
YC
RE
TA
CE
OU
S
PALAEOZOIC
PLEISTOCENE
NE
OG
EN
EP
AL
AE
OG
EN
E
PLIOCENE
MIOCENE
OLIGOCENE
EOCENE
PALEOCENE
UP
PE
RL
OW
ER
MAASTRICHT
CAMPANIAN
SANTONIAN
CONIACIAN
TURONIAN
CENOMANIAN
ALBIAN
APTIAN
BARREMIAN
HAUTERIVIAN
VALANGINIAN
BERRIASIAN
MOKAMI
LEIF MBR
MARKLAND
UNNAMED (GLACIAL BEDS)
FREYDIS
MBR
BJARNI
ALEXIS
SAGLEK
CARTWRIGHT GUDRID
KENAMU
SANDSTONE
CONGLOMERATIVECOAL
ARGILLACEOUSSANDSTONE
SHALE
RED BEDS
MAFIC VOLCANICINTRA VOLCANICSEDIMENTS
LIMESTONE
DOLOMITE
META-SEDIMENT
SOURCE
RESERVOIR
Labrador Shelf Stratigraphic Chart
Labrador Shelf Cross-sectionHopedale Area
Source: CNOPB
6
ResourcesPotential Resources
GAS (TCF)Condensate (MMBL)
Potential Resources 18.99 500.1
% Discovered 17.2 9.2
Discovered Resources
FIELDProven 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
Discovery SDL Operator Year Water Reservoir Reservoir Estimated ReservesDepth
(m) Depth (m) Gas (BCF)Cond.
(MMBBL)
Bjarni 185APetro-
Canada 1973 140 L. Cret-Bjarni Fm 2515 863 31
Gudrid 184Petro-
Canada 1974 300 Paleozoic 2838 924 6
Hopedale 203 Husky 1978 550 L. Cretaceous 1983 105 2
Snorri 187Petro-
Canada 1975 141 Paleocene 2493 105 2
North Bjarni 185BPetro-
Canada 1980 150 L. Cret-Bjarni Fm 2423 2,247 82
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
Pipeline LNG Carriers Production Volume CNG Carriers 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 solidsRemoval 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
Erosion Protection
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: CashflowNPV 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
Development Option
Field Size (TCF)
Gas Price $ / MCF
Cash Flow $US mm
NPV10 $US mm
NPV15 $US mm
ROR (after tax) %
FPSO/CNG 2.3 4.30 1001.63 253.2 20.0 15.5 5.0 4.30 2320.1 703.4 212.6 17.8 1.5 4.30 618.3 141.3 -14.2 14.5 2.3 5.44 2358.0 1004.8 613.4 29.1 5.0 5.44 4910.9 2144.4 1350.5 31.3 1.5 5.44 1588.7 682.4 414.3 28.5 2.3 3.20 -90.7 -408.9 -528.1 NEG 5.0 3.20 145.8 -598.4 -863.2 1.7 1.5 3.20 -174.4 -336.8 -408.4 NEG CNG / Island 2.3 4.30 424.0 -296.1 -529.5 5.2 5.0 4.30 1479.9 -99.9 -595.2 9.2 1.5 4.30 122.6 -322.7 -475.0 2.4 2.3 5.44 1810.5 502.8 117.5 16.9 5.0 5.44 4191.2 1417.9 616.5 20.5 1.5 5.44 1117.5 262.2 2.7 15.1 2.3 3.20 -1508.2 -1494.2 -1515.2 NEG 5.0 3.20 -1946.7 -2259.7 -2393.3 NEG 1.5 3.20 -1306.5 -1197.1 1188.9 NEG CNG / GBS 2.3 4.30 282.4 -277.5 -473.5 4.6 5.0 4.30 1286.1 -62.3 -503.1 9.4 1.5 4.30 12.0 -305.1 -427.6 0.4 2.3 5.44 1692.9 523.5 170.5 18.1 5.0 5.44 4035.4 1461.6 707.4 21.9 1.5 5.44 1022.3 279.1 45.9 16.2 2.3 3.20 -1641.7 -1461.8 -1455.6 NEG 5.0 3.20 -2162.3 -2207.5 -2280.9 NEG 1.5 3.20 -1411.19 -1171.8 -1134.27 NEG
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
Ranking Of Investor Internal Rate of Return (Gas)
Ireland
Morocco : Deep WaterMorocco : On & Off-shore
United Kingdom
Faroe IslandsGuyana
CongoGreenland
Canada : Nova ScotiaCanada : New foundland
DenmarkBrazilTrinidad and Tobago
Namibia
Trinidad and Tobago
Suriname
Algeria
Algeria
Iraq
Portugal : Offshore < 200mPortugal : Deep WaterPortugal : Onshore
Kyrgyzstan
Falkland IslandsNetherlands
BrazilSuriname
USA : AlaskaNorw ay
Angola : On & Off-shoreAngola :Deep Water
RussiaMongolia
0%
10%
20%
30%
40%
50%
60%
0 5 10 15 20 25 30 35
Source: IHS Energy
Benchmarking
24
Fiscal System Benchmarking
Benchmarked with the following countries:Netherlands IrelandNorwayTrinidadAlaskaCanada – 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 SDL’s.
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 CNOPBSDL have no prescribed date for expireNo economic trigger for operator to
move forward when market conditions allow
No requirements for company to periodically revisit economics if pricing environment changes
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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
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Market Analysis – NE US
Labrador Shelf
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Justification for NE US Market
Reserve SizeProximity to NE USUS 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
Phase Option Engineer
Development
Operation
Abandonment
FPSO
75% 30% 95% 95%
Caisson/Island 90% 95% 95% 95%
GBS
90% 95% 95% 95%
Overall Project
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Local Labour Content
Phase Option Engineer
Development
Operation
Abandonment
FPSO 75% 85% NA 90%
Island 75% 95% NA 95%
GBS 75% 95% NA 80%
Drilling
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Local Labour Content
Facilities Construction
Phase Option Engineer
Development
Operation
Abandonment
(de-construction) FPSO 20% 25% 90% 90%
Island 90% 95% 95% 95%
GBS 90% 95% 95% 95%
35
Local Labour Content
Facilities Installation
Phase Option Engineer
Development
Operation
(maintenance) Abandonment (operations)
FPSO 65% 75% 85% 90%
Island 80% 95% 95% 95%
GBS 80% 95% 95% 80%
36
Local Labour Content
Transportation
Phase Option Engineer
Development
Operation
Abandonment
FPSO 5% 75% 95% 95%
Island 5% 95% 95% 95%
GBS 5% 95% 95% 95%
37
Local Labour Content
Management
Phase Option Engineer
Development
Operation
Abandonment
FPSO 100% 100% 100% 100%
Island 100% 100% 100% 100%
GBS 100% 100% 100% 100%
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: WomenPeople 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 LabradorCentre for Marine Training Quebec/Labrador North St. Lawrence
RoadScholarships
43
QHSE - Policy
Protection of workersProtection of environment Desirable qualityModest Profit
44
QHSE
Design of QHSE ProcessLoss Avoidance vs Max ProfitsHuman Element
Investor/OwnersManagementWorkforce
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 fishSeismic 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
differentlyReduce light penetrationDecrease in sea lifebiological changes in fish larvaeTechnology and advances in drilling fluids
can reduce impact
48
Environment Impact - Drilling
Drilling Cuttings Impact is proportional to solids dischargeThe 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 reservoir’s 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 favorableBase 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 RequiredMarket – NE USLocal Benefits Agreements required,
other local initiatives that could be taken