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Monetizing Labrador Shelf Gas – Group Project

Master Oil and Gas StudiesMemorial UniversityDecember 16, 2004

By: Lloyd ButtonRandy HiscockPenny NormanLuis Serrano

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Purpose

Technical and economic feasibility of commercializing stranded gas development offshore Labrador

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World Energy Demand Trends

Demand warrants serious consideration for Province’s future economic growth

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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

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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

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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

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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

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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.

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Production Volume verses Distance to Market

Pipeline LNG Carriers Production Volume CNG Carriers Distance to Market

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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

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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

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Options Considered

Floating production storage offloading (FPSO) with CNG tankers;

Caisson / Island - CNG tanker; and Concrete gravity based structure (GBS)

- CNG shuttle tanker

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Option 1: FPSO-CNG

Wells Drilled from separate MODU

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Option 2: Caisson/Island-CNG

Erosion Protection

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Option 3: GBS-CNG

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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)

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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

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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

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Economic Analysis - Sensitivities

1. Development costs (most sensitive)

2. Pricing

3. Reserve Size

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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

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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

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Other Revenue Sources

[Randy any ideas??]Confirm higher reserves (exploration)Higher Prices likely

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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

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Fiscal System Benchmarking

Benchmarked with the following countries:Netherlands IrelandNorwayTrinidadAlaskaCanada – Nova Scotia

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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

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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

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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

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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

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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%

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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%

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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%

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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%

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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)

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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.

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Diversity

In addition to First Nations people, commitment to provide fair and equal opportunities should be given to: WomenPeople with disabilities Other visible minorities

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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

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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

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QHSE - Policy

Protection of workersProtection of environment Desirable qualityModest Profit

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QHSE

Design of QHSE ProcessLoss Avoidance vs Max ProfitsHuman Element

Investor/OwnersManagementWorkforce

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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

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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.)

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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

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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

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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

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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

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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

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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

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Conclusion (2)

Exploration to confirm reserves required Gas Clause RequiredMarket – NE USLocal Benefits Agreements required,

other local initiatives that could be taken