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Big oil asking for help may strike some as odd, but the need for government support is real, industry experts say.
Husky Energy said Wednesday it will review its West White Rose oil project in Newfoundland and Labrador. At the same time it went public about its desire for the federal and provincial governments to invest in the project.
Husky suspended construction activity on the project in Argentia and Marystown in mid-March as the realities of the COVID-19 pandemic became evident. The price of oil had plummeted and continued to do so in the following weeks, creating cash flow problems in the present and uncertainty about the future.
In an interview with The Telegram Wednesday, senior vice president for Atlantic Canada Jonathan Brown said the company is proposing government invest in the project, adding that even though it is 60 per cent finished, the company could conceivably decide to walk away from West While Rose. A company spokeswoman told the Financial Post Wednesday the proposal would be “similar to the government’s investment in Hibernia,” another offshore Newfoundland and Labrador oil project.
Randy Ollenberger is managing director for BMO Capital Markets and has followed Husky for years. Ollenberger said Husky’s move may look like a pressure tactic to get Ottawa to budge in talks with industry that have gone on for months but is just recognizing industry realities.
“I can’t speak for Husky, obviously, and don’t know what’s going on behind the scenes there, but if you just look at the project and where Husky sits and their demands on cash flow and their balance sheet, I think it’s a legitimate pause and review. I think they’re suggesting that given this commodity price environment doesn’t change, the only way this thing could proceed would be with some sort of government support. Much the same way Hibernia in the mid-80s, when oil prices had also collapsed, that project wouldn’t have gone ahead but for the federal government support,” Ollenberger said.
“If commodity prices don’t change, they probably would not proceed with that development for some time.”
In a statement issued to The Telegram Thursday, a Husky Energy spokeswoman reiterated the company’s need to obtain government support to continue work on the project during an uncertain economic period.
“There are major decisions to be made in the near-term on a 2021 restart for West White Rose which will have significant implications for the project, our operations in the region, and our people. In addition to updating our people and contractors that major decisions are pending, we also needed to update investors on the status of the project. The fiscal reality is that we need government support to restart this project.
Ollenberger was not surprised by Wednesday’s announcement, adding it’s not an isolated issue.
“We’re seeing oil and gas companies really pause and rethink developments around the world and delay them,” he said.
With a collapse in demand for petroleum products linked to the pandemic and outlook for that demand remaining uncertain moving forward, Ollenberger suggests companies need to carefully look at their balance sheets to ensure they stay in business and generate returns for shareholders.
Paul Barnes, the director for Atlantic Canada and Arctic for the Canadian Association of Petroleum Producers, said the need for government action is very much a real issue for the industry.
“We’ve got a number of projects that decisions have to be made on in the next several weeks,” said Barnes, acknowledging budget preparation for 2021 and weakened cash flow factors into this.
“There’s less money to invest in 2021, so where is that money going to be invested is the big question mark,” he said.
A number of exploration programs have been delayed in Newfoundland and Labrador’s offshore, and Barnes noted the deadline for submitting sealed bids to obtain exploratory licences for 17 parcels covering almost 4.2 million hectares is coming up Nov. 4.
“They look highly prospective, and the question is, will companies bid on them at this point in time or not?” he said. “That’s why some signals from government that they want to support this industry in some way, they want to see it grow and sustain itself, is also important at this time. Because it will impact the investment decisions on that land sale.”
Without action from government, Barnes expects to see delays extending into 2022. On the exploration front, his organization is calling on the federal government to create a tax credit to spur on activity.
“What we’re seeing in other countries around the world is the governments are offering some type of incentive for the oil and gas players to continue to invest in their region,” Barnes said. “We haven’t seen that in Canada. The concern we have as a Canadian industry and specifically, we here in Newfoundland as the Canadian offshore side of the industry, is the investment decisions that have to take place here in the next little while may not take place here, but may take place in other countries at our detriment.”
In an interview with The Telegram Wednesday, Newfoundland and Labrador Natural Resources Minister Andrew Parsons confirmed Husky is looking for a “significant equity investment” in the West While Rose project, similar to Hibernia, but suggested the money may simply not be there.
“We’re going through our own difficult times,” Parsons said, alluding to it significant budgetary issues brought on by the low price of oil and the challenges linked to the COVID-19 pandemic.
“To come up with a significant investment of cash is extremely tough. There’s a difference between willingness and ability,” Parsons continued. “We’re willing to do what we can to support and help, but our ability makes it difficult.”
Barnes acknowledged the province is limited in what action it can take to help the industry due to its own fiscal situation.
“The province has certainly come out and said they want to see this industry grow and support it,” he said. “We do know certainly, they have limited capability, but we want to see some type of more positive support from the federal government.”
— With files from Postmedia