Capital costs for a newly sanctioned oil field under development 200 miles off the coast of Newfoundland have ballooned to nearly three times the original cost estimate. But despite the $14-billion price tag for the Hebron offshore drilling project, which includes construction of a gravity-based drilling platform, senior project manager and ExxonMobil Vice President Geoff Parker says official project sanction "marks a significant milestone" for Hebron.
"Construction … has already begun at the Bull Arm fabrication site," Parker said in a press release. "We anticipate commencing fabrication of the topsides in 2013. Co-venturer sanction confirms we will continue with this significant project for the province."
The Hebron's GBS platform underwent front-end engineering and design last year. It is expected to produce 150,000 barrels of oil a day, with a project life-span production goal of more than 700 million barrels. ExxonMobil also has told the provincial government the oil field will employ, at its peak, 3,000 to 3,500 workers, including contractors, subcontractors and skilled labor.
Such assurances have come at a price, however. Six years ago, cost estimates for Hebron stood at $5 billion, then rose two years later to $8.3 billion. To help offset the new $14-billion price tag, the government of Newfoundland agreed to extend its low royalty rate of 1% until those costs are recovered; after that, the rate rises to 20%. According to Wade Locke—an economics professor at Memorial University, Newfoundland, who prepared an independent report on the Hebron field's viability in 2011—higher costs and lower royalty rates are often the cost of developing megaprojects in Canada.
"When you start off, it takes a period of time for you to develop. By the time development is under way, certain things may have changed in terms of the supply of steel, supply of labor and costs … as they are in this case," Locke adds.