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The Economic Review, November 2004
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Oil and Gas

Offshore Production
After six years of rising oil production, output in 2004 is expected to decline by 2.9% to 119.4 million barrels, unchanged from the March forecast. However, significantly higher oil prices will result in the value of production increasing by over 15% to an expected $5.7 billion in 2004.

Total oil production in the first eight months of 2004 is down 1.9% to 80.6 million barrels, as a result of lower production from Terra Nova. Terra Nova production of 30.8 million barrels in the first eight months of 2004 was down 4.8% from the same period in 2003. Gas compression issues and facility repairs restrained production during the year. Hibernia production of 49.8 million barrels in the first eight months of 2004 was on par with production in the same period in 2003.

Value of Oil Production
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f: forecast
Department of Natural Resources; Economic Research and Analysis Division, Department of Finance

 
 

White Rose
Significant progress is being made on the province’s third major oil development. The majority of the work in 2004 is associated with continued drilling of development wells, field integration of the subsea production system, and topsides construction and integration of the SeaRose FPSO. The heavy-lift campaign for the topsides modules was completed ahead of schedule on July 31, 2004 with ongoing work focusing on the integration of all the topsides into one functioning unit. This integration work is expected to continue until the third quarter of 2005 when the FPSO is scheduled to leave for the White Rose field for testing. There are currently close to 2,000 people in this province working on the White Rose project, including: people in engineering/project management in St. John’s; electrical module preparation in Bull Arm; and fabrication and other related work in Marystown.

The project operator, Husky Energy, expects production to begin in late 2005 or early 2006. White Rose will add almost 34 million barrels of oil to provincial annual output, at peak production. 

Exploration
The majority of current exploration activity is related to the collection of seismic data. A significant 2-D seismic program is currently ongoing in the relatively unexplored Laurentian Sub-Basin which is to be followed by 3-D data collection next summer. These seismic programs are laying the groundwork for future exploration drilling in the Sub-Basin, which is expected to occur in late 2006 or early 2007.
Tankers offloading at Whiffen Head oil transshipment facility

Husky Energy plans to conduct an exploration program on its Lewis Hill prospect in the South Whale Basin sometime in 2005. Other future exploration drilling will likely take place in deep water, as the industry has recently shown considerable interest in these areas. Petro-Canada has announced that one of its next areas of interest is the Salar Basin which is located southeast of the Jeanne d’Arc Basin in water depths of up to 1,500 metres. Exploration drilling in this area is not expected until 2005 or 2006.

The record land sale of 2003 signaled that there is still significant interest in the province’s offshore. Almost $673 million in work expenditures was committed, bringing total outstanding work commitments in the offshore to over $960 million. These commitments are spread over 36 licences which have varying expiry dates spanning the next five to six years. As a result, the province could see as many as 10 wells drilled over the next several years.

Oil Prices
No story in the oil industry in 2004 has garnered more newspaper headlines recently than rising oil prices. World oil prices have shown considerable momentum, with the price of Brent crude oil growing by 27% to average US$36.29 per barrel in the first nine months of the year. Prices rose steadily throughout the year, and were more than US$50 per barrel at the time of writing. The price of oil is now expected to average almost US$38 per barrel for the year. In nominal terms, year-to-date prices are exceeding previous peaks recorded in the early 1980s. Adjusted for inflation, real prices in 2004 are about half of what they were in the early 1980s but are the highest they have been since the mid-1980s.
 

The steep and rapid rise of oil prices are of concern to economic forecasters because a sustained increase could significantly impact consumer spending and inflation. Rising oil prices are of particular concern to individuals who are living on fixed incomes. Higher oil prices have translated into higher prices for gasoline and home heating fuel, placing additional burdens on consumers. Extended periods of high oil prices usually result in an increase in the price of consumer goods as higher costs of transporting these goods to market are passed onto the consumer.

Oil Prices
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f: forecast
BP Global; Economic Research and Analysis Division, Department of Finance

On the other hand, there are significant positive impacts for Newfoundland and Labrador associated with high oil prices. With higher oil prices come increased tax revenues for the province and also increased royalties from the province’s producing fields. Higher oil prices can also act as a stimulus for the development of alternative sources of energy, which could be positive in terms of moving forward with the Lower Churchill development. As well, improved oil company cash flows may lead to increased oil exploration efforts off the province’s coast which could lead to future oil and gas projects. Higher oil prices might also provide the stimulus needed for the project owners to push forward with the Hebron-Ben Nevis project making it the province’s fourth oil producing project.

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This information was current as of October 25, 2004.
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