The Oil Blog Series Part 4: Offshore Oil Production

June 29, 2020

Newfoundland and Labrador leads oil production outside of Western Canada

Newfoundland and Labrador (NL) is the only Atlantic Canadian province currently producing oil, and the largest producer outside of Western Canada. Roughly 6% of Canada’s oil production comes from NL.

The oil and gas industry is a major contributor to the NL economy. In 2018, the industry accounted for 25% of the province’s overall gross domestic product (GDP). Similar to other oil-producing provinces, NL’s economy relies heavily on oil prices. The most recent forecast shows that NL’s GDP will decrease by 1.5% in 2020 due to declining oil prices and demand.

The oil industry is so important for NL that oil royalties (revenue from oil production) have accounted for 10 to 30% of the province’s revenue in the last 15 years. The two-month shutdown of one project alone, the Hibernia platform, meant $185 million less revenue for the province in 2019.

Oil production to decline after 2025 

Offshore production in NL includes four oil projects – Hibernia, Terra Nova, White Rose, and Hebron. In November 2019, the province’s offshore oil production reached 340,000 barrels of oil per day, the highest level in ten years. However, this volume is expected to decline after 2025, going to 100,000 barrels of oil per day in 2040, unless other oil projects come into production.

Newfoundland offshore oil production between 2005-2040 (in millions of barrels per day)

Source: The Canada Energy Regulator (CER).

Hebron and expansions maintain provincial production levels

Hibernia was the province’s first commercial offshore oilfield, with production starting in 1997. In 2019, Hibernia produced about 130,000 barrels per day, but its production is expected to gradually decline starting in 2020.

The Hebron project, which was started in 2017, expected to increase its oil output to 130,000 barrels per day in 2022, from 110,000 barrels per day in 2020. This increase is expected to offset falling production from other offshore projects, mainly from the Hibernia project.

After 2022, with the production from Hebron declining, new production is expected to come online from the Terra Nova and White Rose expansion projects. The Terra Nova oilfield, which began operating in 2002, is expected to provide approximately 30,000 barrels per day. The White Rose project, which entered into production in 2005, is expected to increase its production to a peak of 75,000 barrels per day in 2025 by tapping into new wells by 2022.

After 2025, NL’s oil production is likely to decline as no new projects or expansions are planned.

An additional project in Bay Du Nord was intended to produce its first oil in 2025. However, development in the project was deferred this year due to low oil prices. Bay du Nord has estimated resources of 300 million barrels of oil and an oil production capacity of 94,000 barrels per day.

Atlantic Canada projects

Source: The Canada Energy Regulator (CER).

Offshore oil projects are multi-billion dollar investments and take years to produce

The cost of offshore oil projects is one reason why oil production in NL is not expected to increase. The investment needed to develop an offshore oil field is massive given the costs of drilling, building offshore production platforms, and installing subsea oil production systems. It can take more than a decade for offshore projects to produce their first drop of oil. As an example, the Hebron project cost approximately $14 billion and it took 17 years to produce its first oil.

Offshore drilling is particularly expensive, and often represents nearly 90% of an offshore oil producer’s total investment. These costs, which include the cost of oil rigs and drilling equipment, can vary depending on the depth being drilled, as it typically costs more to drill deeper wells. From 2013-2018, the average cost for each offshore oil well in NL was about $96 million, and projects require multiple new wells every year.

Future investments, like those of the past, will be closely tied to the price of oil. Based on estimates from the oil and gas data firm Rystad Energy, a 50% increase from Canada’s offshore production to 500,000 barrels of oil per day by 2030 would require oil prices to increase to US$100 per barrel.

Potential for exploration

Recent studies in 2015 and 2016 estimate undiscovered resources of 37.5 billion barrels of oil off the coast of NL. Based on these potential resources, in 2018 the province launched the Advance 2030 plan aiming to nearly triple the province’s oil production to 650,000 barrels per day by 2030.

Building on that, in 2019, the government opened the Carson-Bonnition and Salar Basins for exploration, which are expected to have an additional 3 billion barrels of oil.

The Hebron platform

Source: Offshore magazine

Two large oil spills reported in NL

Offshore oil spills are the biggest concern in offshore oil exploration and production. Oil spills are particularly harmful to marine birds, fish, and shellfish.

The prevention of oil spills in the region is critical, as its offshore platforms are located in the vicinity of NL’s Grand Banks, which are home to the depleted yet legendary fisheries that fueled the region’s economic growth for centuries. Part of what makes the Grand Banks region uniquely biodiverse and sensitive to disturbance is that it exists at the nexus of two major ocean currents – the southerly flowing Labrador Current and the northerly Gulf Stream.

The Canada-Newfoundland and Labrador Offshore Petroleum Board, the government regulator, is responsible for monitoring spill cleanups by industry.

Two large oil spills, in 2004 and 2018, have been reported in NL to date.  In 2004, a 165,000 litre oil spill from the Terra Nova platform is believed to have killed 10,000 seabirds. The wildlife impacts of Canada’s second major oil spill, the 250,000-litre spill from the West White Rose Project platform SeaRose in November 2018 are not yet known.

Elsewhere in the world, the two largest offshore oil spills reported to date were the Deepwater Horizon oil spill (2010), with an estimated 5 million barrels of oil released, and the Ixtoc 1 Oil Spill (1979), which saw the release of 3.4 million barrels. Both oil spills occurred in the Gulf of Mexico.

In general, oil platforms themselves produce significant amounts of greenhouse gases (GHGs), as they are powered by combustion equipment and burn, or “flare”, the excess natural gas produced from the wells. Even accounting for flaring, emissions from NL’s offshore production are far lower than the oil sands, averaging 18 kg of carbon dioxide per barrel compared to 44.

In 2017, the GHG emissions from offshore oil production in NL were 1.8 Mt CO2e (million tonnes of CO2 equivalent), approximately 1% of Canada’s oil and gas industry emissions.