THE STANDING SENATE COMMITTEE ON ENERGY, THE ENVIRONMENT AND NATURAL RESOURCES
EVIDENCE
OTTAWA, Thursday, November 27, 2025
The Standing Senate Committee on Energy, the Environment and Natural Resources met with videoconference this day at 8:01 a.m. [ET] to examine and report on Newfoundland and Labrador’s offshore petroleum industry.
Senator Joan Kingston (Chair) in the chair.
[English]
The Chair: Before we begin, I’d like to ask all senators to consult the cards on the table for guidelines to prevent audio feedback incidents. Ensure your earpiece is away from the microphone at all times. Do not touch the microphone. Activation and deactivation will be managed by the console operator. Finally, please avoid handling your earpiece while your microphone is on. Earpieces should remain on the ear or be placed on the designated sticker at each seat. Thank you for your cooperation.
[Translation]
I would like to begin by acknowledging that the land on which we gather is the traditional, ancestral, and unceded territory of the Algonquin Anishinaabe Nation.
[English]
I am Joan Kingston, senator from New Brunswick and Chair of the Standing Senate Committee on Energy, the Environment and Natural Resources. I would ask my colleagues to introduce themselves as well.
[Translation]
Senator Verner: Josée Verner from Quebec. I am the deputy chair of the committee.
[English]
Senator D. M. Wells: David Wells, Newfoundland and Labrador.
Senator Fridhandler: Daryl Fridhandler, Alberta.
Senator McCallum: Mary Jane McCallum, Treaty 10 territory, Manitoba region.
Senator Lewis: Todd Lewis, Saskatchewan.
[Translation]
Senator Youance: Suze Youance from Quebec.
Senator Aucoin: Réjean Aucoin from Nova Scotia.
Senator Miville-Dechêne: Julie Miville-Dechêne from Quebec.
[English]
The Chair: I’d like to welcome everyone with us today, as well as those listening online at sencanada.ca.
Today, pursuant to the order of reference received from the Senate on October 8, we are pursuing our study on Newfoundland and Labrador’s offshore petroleum industry.
Today, we are pleased to welcome for our first panel, from the Oil and Gas Corporation of Newfoundland and Labrador, Jim Keating, Chief Executive Officer, by video conference.
Mr. Keating, welcome, and thank you for being here this morning. You will have five minutes to make opening remarks, after which we’ll have a question-and-answer session with the senators. Mr. Keating, the floor is yours.
Jim Keating, Chief Executive Officer, Oil and Gas Corporation of Newfoundland and Labrador: Thank you, honourable senators, for your invitation to speak today.
Newfoundland and Labrador’s offshore oil and gas industry is the cornerstone of the province’s economy, and it is a strategic energy asset for Canada. The responsible development of these world-class resources strengthens our energy security, creates jobs and positions Canada as a global energy leader in the supply of the most ubiquitous form of energy that mankind consumes.
Our offshore industry is unique and globally competitive. I’d like to highlight five areas where we have some differentiation from what we consider the bedrock of the Canadian oil and gas business, the Alberta oil sands, for example.
First and foremost, we have the robust governance model and are jointly managed under the Atlantic Accord, a federal and provincial jurisdiction, which opens up unique opportunities — and sometimes impediments — when we are dealing with international companies trying to understand the myriad of government agencies and the regulatory process they must navigate.
In particular, in my circumstance where my job is to attract foreign direct investment, what is the role in regard to promotion of our offshore in terms of an investment location, and how are Canada and Newfoundland coordinating in that space? There is an element of difference there.
Second, our low-carbon, globally competitive oil is recognized worldwide. One of the leading producers of such advantaged hydrocarbons, Equinor, is positioned to develop what could be a world-class project with low-decile emissions of 8 to 10 kilograms per barrel. This is an energy intensity that is an envy and almost half of the global average.
Third, we have an enormous resource potential. We have developed over 1.2 billion barrels to date. We’ve only licensed 10% of our offshore sedimentary basins. We’re very young in terms of our evolution.
My company has invested over $160 million in geoscience programs to de-risk this resource base. We have determined through the past 10 years of geophysical data accumulation and resource assessments that we have the potential for 50 billion barrels more and over 100 trillion cubic feet of natural gas. This means potentially as many as 15 to 20 projects in addition to the 4 that we have could be revealed if we had a dedicated and vibrant exploration sector.
Fourth, we are a global energy player. Of Newfoundland and Labrador’s offshore oil, 100% is exported internationally, about 50% of that to European markets and the balance to the United States.
Historically, we have sold our oil to the refinery in New Brunswick. But for the most part, for the past year and probably the foreseeable future, it is 100% an international export.
Last, a differentiating factor is that when we speak of exploration specifically, the decisions taken are made in international boardrooms and not in Canadian ones. There are no Canadian oil and gas companies, save for Cenovus with their operations in China, that are interested in participating in deepwater exploration.
We are targeting 15 to 20 companies that are global explorers these days, of which only 3 have ongoing exploration plans for Newfoundland and Labrador. We have significant potential in terms of our resource base, and significant potential in terms of capture of those foreign direct investments.
I wish to finish by saying that the contribution for our oil and gas sector is not to be understated. Companies invested over $7.4 billion in the sector up to 2024. In 2023, our GDP was boosted by $7.4 billion for an economy of a half million people. This represented 22% of real GDP and 15% of the government’s provincial budget. Indeed, it is the underpinning of this region’s economy.
Finally, even in direct benefit, over $29 billion of royalties has been paid to the provincial government since the first oil in 1997 from the Hibernia project. I wish to conclude by saying that for the first time in 25 years, we have no exploration wells planned offshore, and we are not likely to see one in 2026 or 2027 either. This is unprecedented.
With the strategies that we have put in place where we had attracted from 2015 to 2020 $4 billion worth of exploration commitments, and attracted over 14 companies, that’s all but been suspended. What we are looking for now is a pivot, a turning point.
We believe the recent discussions and announcements related to revisiting, reviewing or even eliminating the emissions cap are a good step because, when I go abroad, that is the number one reason I am given that companies are not willing to invest in our offshore exploration.
Second, a little closer to home, we need to move ahead with the Bay du Nord project. When these two things occur, that gives investor sentiment a boost, and we are back in the exploration business as we were strongly through 2017, 2018 and 2019.
I would like to finish there, and I remain open to your questions.
The Chair: Thank you, Mr. Keating. We have senators that wish to ask questions.
Senator D. M. Wells: Thank you. Before I start my questions, I want to point out that I’ve known Mr. Keating professionally for a number of years, and his contributions to the Newfoundland and Labrador oil sector have been immeasurable. I want to publicly thank him for his service to our province and our country.
Mr. Keating, what are the major regulatory impediments to the growth of our sector? You mentioned that there are no exploratory licences granted for 2026 and possibly 2027 once those bid rounds are closed. What are the major regulatory impediments that we face?
Mr. Keating: As I mentioned, it is the emissions cap, not to belabour it now because I’m hopeful we’re moving past it. But every company that I talk to cites the emissions cap as a limiter insofar as in all modelling, we see that the Bay du Nord project could have been started, but at some point in the sixth or seventh year of production, the way the emissions cap was structured, the companies operating our offshore would not only pass through the first line of emissions limits and get into penalties but would be at the punitive level. In fact, one of our projects would have to shut in. How that is done, adjudicated and selected among a myriad of operators was hard to determine, which emphatically means that there is no room for a fifth project.
That is a fatal reason. But I will highlight something else that’s perhaps even more problematic. We believe the protection of the oceans is vital and that marine protected areas are essential to Canada’s well-being as a safe and vibrant ecosystem, and we believe in being responsible on the world stage. But we have 1.8 million square kilometres of offshore area, of which only 10% has been licensed.
Through the phase of marine protected area, or MPA, discussions, in which companies are consulted, companies were presented with maps, for example, which highlight vast areas of our offshore that encompass these productive areas and exploration areas. With the notion that Canada is evaluating and considering marine protected areas in and among these highly prospective production areas, until this is essentially resolved, companies will stay on the sidelines, not willing to invest or commit.
In essence, these are two of the main impediments that I see from a macro level that actually prevent a company from even initiating an exploration bid, because as a result of not being able to rely upon the ability to see through the end of their investment, they will simply go elsewhere.
Senator D. M. Wells: Thank you for that. Could you talk a little bit as well about the potential for gas? In Newfoundland and Labrador, we talk about oil a lot because that’s where our revenues come from, but what about the potential for gas, and what would it take to get that out of the ground?
Mr. Keating: We have an immense potential for gas. As I highlighted in my opening remarks, there is about 100 trillion cubic feet worth of gas potential. To put some perspective around it, the Sable gas development offshore Nova Scotia operated for about 15 years on just 3 trillion cubic feet of natural gas. It’s my belief that there are two sources for natural gas development, which is key and pivotal for our export partners in Europe in particular.
One is through the Grand Banks gas, which is gas that’s accumulated among the four producing fields. Right now, the level of access to those gas molecules is a little desperate, and it’s spread around and owned by different companies. The volume is just below an economic threshold. However, as we proceed through the production and that gas is no longer used for pressure support for oil production, in a technical capacity, and we reach blow down of these reservoirs, the gas becomes a monetization opportunity. There should be an effort to look at the normalization of interests in the basin as a whole to align commercial interests so that we’re well positioned to capture this gas project.
The one I want to highlight that is seldom discussed is that we have about 24 prospects that are at least 1 billion barrels, or 6 to 7 trillion cubic feet in size, waiting to be drilled. From geophysical data from seismic activity, it’s hard to determine if it’s water, oil or gas. You need to actually drill the well.
If we encounter a prospect of gas to that level and size — seven or more trillion cubic feet, or TCF, field in exploration — that’s immediately an LNG development. That’s the kind of threshold that multinational companies look for.
My expectation is that, while we’ll constantly look at the Jeanne d’Arc Basin as a place to develop the known gas resources among four fields, there could be, through serendipity in looking for an oil field, you find a massive gas cap, and that practically overnight opens up a major LNG export scenario that rivals anything that we’re considering on the West Coast at the moment.
Senator D. M. Wells: Thank you very much, Mr. Keating.
[Translation]
Senator Miville-Dechêne: Mr. Keating, thank you for joining us this morning. I would like to talk to you from an environmental perspective. Newfoundland and Labrador boasts about its oil, which it describes as “clean”. However, according to Statistics Canada, more than half of the oil in this province is heavy oil, which requires more refining.
I would like to know this: Do you think this situation could hurt oil sales, given that light oil is perhaps more favoured by buyers at the moment?
You also mention 15 to 20 potential projects that could arise if the situation changes. Are we talking about heavy or light oil here? Could you try to explain the difference between the two and tell me what happens next?
[English]
Mr. Keating: We are talking primarily about a light blend. In the parlance of oil and gas companies, it’s between 28 and 36 API, which tends to mean that the level of effort — and therefore energy and emissions — needed to refine it to different grades is lower than most others. In fact, it’s part of the reason why our crude is actually attracting a premium to Brent. So the Brent price today may be $61. We’re selling some of our offshore crude at $62 and $63 because certain refineries in Europe are tooled to take that lighter oil and are seeking ours out and paying us a premium. The Bay du Nord project is no different: It will fall into that category.
Our only project in which we have a heavier grade of oil is Hebron, and even in that case, at 28 API, it is considered on a world stage to still be in that top quartile top third of crude, even though we consider it a heavy crude.
Right now, for us, in terms of all of our reservoirs and all the geological settings in which they exist, we believe that as we go forward and make more discoveries, we will be consistently fed by those source rocks that get that age of crude, which implies then the level of quality which you mentioned. That’s a simplified way to technically describe it.
[Translation]
Senator Miville-Dechêne: Absolutely. So why, according to Statistics Canada data, is 50% of the oil extracted in Newfoundland and Labrador heavy oil?
[English]
Mr. Keating: I’m going to try to understand that question. A full 100% of the oil is crude, but also 100% would be called “lighter oil” — 28 API and over — as opposed to Alberta oil, where you’re in the high teens or low twenties, to put some perspective to that. There is no bitumen in our offshore. It’s all very viscous, flows and is easily refined.
Senator Miville-Dechêne: This is highly technical and probably a bit above my grade. We’ve been told, and you’ve said it too, that there is a standstill in the project. What is your level of confidence that it will start again? Apart from Bay du Nord, we don’t see other projects starting.
Mr. Keating: With regard to Bay du Nord, I am involved in some of those discussions. In the interest of negotiations, I won’t say too much, but I will say that I have been doing this for 30 years. I’ve seen the obstacles that companies face. I have seen the positions they take with successive governments in terms of industrial benefits, fiscal terms and even state equity and ownership.
There is nothing that I see right now that is insurmountable. I think the contractors, operators and government are mutually aligned. While we have some difficult discussions yet to have, I think there is a huge alignment that this should and would proceed.
I’m very optimistic that, within a couple of months — there are key milestone dates that the operator needs to hit to commit to this project, and I think the province is absolutely attuned to that — we will see this move forward.
Senator Miville-Dechêne: What is the main obstacle, if I can ask?
Mr. Keating: Right now, the main obstacle is that the new government has made a commitment, particularly to trade unions, for jobs. That’s an important component. I mentioned the three pieces: fiscal terms, industrial benefits and, in this case, state equity.
The challenge is, because the project is modest in terms of its economics — because it’s deepwater, far from shore and there are not as many barrels in the Bay du Nord project as would, say, be in Hebron — the economic robustness of it forces the company to make a choice to apply a commercial approach consistent with a leasing model where these fields and facilities are typically built in Southeast Asia in big fabrication yards to reduce costs, then they sail in and hook up. There are not a lot of opportunities for local benefit. There is the rub.
The province wants to have a significant portion of jobs, be it topside work on the facility itself — it’s a floating vessel — or in the subsea or some combination thereabouts. Right now, the company wants to meet that. I think there is just a difference in expectations as to what degree that request is met.
Senator Miville-Dechêne: Thank you.
[Translation]
Senator Aucoin: Mr. Keating, if this were to go ahead, you mentioned threats or things that could prevent exportation. Does section 56 of Bill C-49 pose a problem for you? Could you discuss that? We heard from witnesses that section 56 of Bill C-49 was a problem for them because the government could intervene. I can explain that further if you like.
[English]
Mr. Keating: Could you remind me what clause 56 is?
[Translation]
Senator Aucoin: Absolutely. The fact is that the government, for specific reasons, particularly those related to climate change, could intervene and develop projects of national interest, but also prevent or curb certain developments if they were likely to exacerbate certain climate changes, for example.
[English]
Mr. Keating: Yes, thank you. I’m well aware now of that clause.
In the balance, when we look at the fullness of the Atlantic Accord — and the different changes that were made in recent years — that would have been seen by many here, and particularly those in the industry, as a carve-out of the equilibrium of the balance between the interests of the province, as the fiscal owner or benefactor of primacy of benefit, and the national interest in terms of, largely, the protection of the environment. There is always intention.
This seemed to move the pendulum in a unilateral way to say that, if I’m an investor and I strike a deal with the Government of Newfoundland and Labrador on benefits, fiscal terms and a production plan, could factors beyond the company’s or the government’s control influence the federal government to take broad action, or even specific action, toward an asset? That creates, again, a level of uncertainty that didn’t exist prior.
I think along the whole, if we think good regulators are good regulators — and I accept and respect that they are — then that’s not such an issue. You are only seeing a manifestation of the technical side — thermodynamics and environmental science — and companies are able to deal with that. They are robust enough in terms of their economic models to cope.
What is striking is the fact that, when coupled with the perception of an anti-production, anti-creation animus toward fossil fuels, it seemed to be a back door to a one-sided approach to climate that may not meet the needs of the world, let alone those of Canada or the investment groups.
I think they point to the emissions cap as a similar kind of policy that has no benefit to global emissions — it’s going to be coming from somewhere else — but it has a national or political angle to it. I think that clause opens up some vulnerabilities that I hear from time to time.
Senator Lewis: Thank you, Mr. Keating, for appearing before us today.
When you talk about LNG, the potential of it and so on, with the emerging markets in Europe and the view in Europe that LNG is going to be a transition fuel — as they call it now as they go forward to nuclear development and similar things — is there interest from Canadian companies in setting up LNG ports or to transport and actually make LNG? Is that something that you see interest from Canadian companies around doing? Would that include multinational companies as well?
Mr. Keating: I see predominantly multinational companies. Most of the Canadian companies are, first and foremost, focused in the West, on the oil sands, conventional foothills, Foothills Gas and their LNG opportunities toward the West.
What we hear and feel is a pull from our European partners and European companies who have established LNG chains from the United States to Europe. The United States is now the biggest supplier of natural gas — though Russia once was — to Europe.
It begs the question — with similar geology and opportunity, why can’t Canada evolve its East Coast offshore natural gas footprint? Because that would be, for geopolitical and security reasons, the optimal solution, certainly now.
We have companies asking us more and more about what the gas prospectivity is, specifically over oil. That’s good to hear. These are largely companies in the space where their discoveries worldwide in the past five to seven years have been predominantly gas versus oil. You can see that trend.
I want to ensure that Newfoundland and Labrador is positioned well, both from a policy and regulatory view. The fiscal framework has to be in place for gas production, and the prospectivity in terms of the knowledge of the geology must be strong enough to attract that investment.
Absolutely, in the AI world that we’re in with all the server farms and the electrification of all things, more and more is being served by natural gas over coal. We need to be a part of that solution. I believe our resources — our rocks — have that potential.
Senator Lewis: So I guess that explains why you don’t have offshore Canadian companies active in Newfoundland. They don’t do it, right?
Mr. Keating: To be fair, we do have two great Canadian companies, Suncor and Cenovus, but they are focused on their production in their current oil fields. We just celebrated the twentieth year of the White Rose Cenovus-operated platform yesterday. That is momentous.
At this point, the primary focus is on oil. Those two companies are not known to be deepwater exploration companies. They don’t have global deepwater positions. We’re thinking about the Exxon Mobils, the Equinors, the BPs and the Totals. These are the global explorers that are drilling 40% to 50% of deepwater wells and 60% to 70% of the new gas fields. That’s the target audience.
Senator Lewis: Thank you.
Senator McCallum: Thank you for your presentation. I wanted address where there has been a challenge to the legality of permits issued to the Bay du Nord project. It is on the grounds that the environmental assessment for the project did not sufficiently consider the cumulative effects of tanker traffic outside the project safety zone and that Indigenous communities were not adequately consulted.
Do you think it’s important for this conversation to be settled before you look at doing 15 to 20 more exploratory projects? What is used for fuel for these tankers? What are the issues that people have with this?
When we look at the alternatives to energy sources that Canada has, electricity is not one of them. So we do not have alternative sources right now, and the best that I can see — because it’s light — is offshore. What is it that we need to settle to better support that as we’re going into renewables and other forms of energy? We were told that nuclear would perhaps come. Can expand on that conversation to see if there is a way to move forward?
Mr. Keating: Obviously, that’s the specific question as to the process that the Bay du Nord project followed through the operator Equinor. It’s probably best to address them in the particulars, but I can give an overview in terms of my feelings and understanding as an active participant that Bay du Nord will be a precedent-setting opportunity, and we’re fortunate that a company like Equinor is so well known. It is a Norwegian-based company. They are quite a successful state-owned company. Two thirds of their ownership is via the Government of Norway, and Norway is considered progressive and best attuned at balancing the needs of the energy trilemma — security of supply, respect for the environment and cost for access. If you can balance those three things, you have an energy source or system that can be relied upon. We’re fortunate to have Equinor and BP as the proponents.
I am satisfied that the most robust environmental review process had been undertaken by Equinor. Anecdotally, there were some 50 to 60 funded and supported third parties or interested parties, as diverse as Indigenous communities in the United States, which had wanted to weigh in on the particulars related to Bay du Nord. So it was probably unprecedented as the widest consultation of anything I’ve known up to this point. The ability of the operator to navigate through that and ultimately receive the environmental approvals from Minister Guilbeault four or five or years ago now is exceptional, and we need to learn from that process.
In terms of being settled, the ultimate sanction of that project, this means that first they need this little agreement with the province in terms of the industrial benefits, fiscal terms and potentially equity. Then they go into the development plan and application phase. That’s the most rigorous technical examination. That’s going to take maybe a year, more or less. At the outcome of that, we will have a lot of best practices from a policy perspective that the next project will likely fall into. There may be some improvements, but for the most part I’m comfortable that’s the right company to navigate that process.
To conclude on the thoughts about where we go from here in terms of the ubiquitous nature of how the demand for fossil fuels continues to rise in the face of all our known realities of the challenges to the climate, it’s true for a project like Bay du Nord that if we can show the world, the companies, the contractors and the analysts how we ought to do this the best way, then maybe that’s actually something we can export. We’re very proud of our regulatory system here. We learn a lot from the North Sea, but this is going to be the newest project, and in probably the most difficult environment. It is the farthest development from shore anywhere in the world and is in deep water. There are many things to watch, have interest in and ultimately take pride in so that, when that finally produces oil, we will know as a society that we did it the right way.
Senator McCallum: Thank you. I want to go to the issue that no bids were received in 2025 in response to the calls for bids issued by the regulator. Does the regulator risk its impartiality with respect to not promoting the development of the petroleum industry by committing to enhancing the competitiveness of Newfoundland and Labrador’s offshore area?
Mr. Keating: I have an opinion about this after 30 years in this region. When I look at all the other jurisdictions, almost all jurisdictions are able to balance the duality of being the policeman, making sure rules are followed and issuing censures and fines, while at the same time being the subject matter repository of where the data and geological opportunities lie. I’ve seen most jurisdictions balance that quite well. They can serve as a vehicle for attraction to show the pathway to investment while at the same time holding firm on companies’ commitments to their environment and financial obligations.
In Newfoundland and Labrador, though, as we’ve evolved, it’s my company’s — it’s the Crown corporation’s — role that’s more or less filled the gap in promotion. We do that, and we spend a fair amount of money each year to do that, and we’ve been able to navigate that. We have a great relationship with our board, our government and shareholders, so it seems to be working.
However, in some ways, I feel there is a hand tied behind our back because when I go abroad, there seems to be an absence of government participation in promotion here. It’s laissez fair. It’s very Canadian to be laissez fair: The private sector knows best, and if they are interested, they come to us, knock on the door and ask. It’s up to us to permit. Most other countries — not just provinces, but countries — are actively promoting. They wear that duality of a regulator and a promoter because they need to attract that investment. Somehow, we’re missing that. It’s my small, humble company of 19 people that is lifting that for at least the provincial interests. It’s a great question. I have evolved. I would have preferred the separation of those two things in my earlier days because it seemed more appropriate. But now, in the times we’re in, there may be advantages to having our regulator take more of a promotional role.
The Chair: Thank you.
[Translation]
Senator Youance: Mr. Keating, you highlighted the robustness of the offshore industry’s governance model. What specific mechanisms ensure that this model protects the environment, local communities and economic competitiveness? Can you also compare this governance model with what is being done elsewhere in the world?
[English]
Mr. Keating: In terms of the fiscal system, we benchmarked this and used consultants to look at different royalty, tax and forms of economic rent. For a frontier area, meaning not mature, not very busy, with not a lot of actors, we are in the right spot — meaning that our fiscal take is probably in the balance of a 50‑50 share of what they call profit dollars.
So after you allow companies to earn their investment back, there is a flat royalty where you’re trying to resolve the net present value decisions of a company. But once they reach the payout and return their investment, then our royalty system steps up. That, as I mentioned before, returns billions of dollars to the provincial economy and then hundreds if not billions more to the federal government in terms of tax. So in terms of gross economic grant, I think there is a balance.
In terms of jobs and employment, 95% of positions here are held by a Newfoundlander and Labradorian or a Canadian. It is a rarity now that I attend an executive-level meeting where I’m looking at vice-presidents from major international companies and do not see a Newfoundlander or Canadian. When I first started 30 years ago, I was the only one. That’s a great thing, and that is an evolution.
That means the decision making about global oil and gas is being “Canadianized” more and more. It’s not just from the Alberta context. It’s now in this international sphere.
In terms of jobs and trades, we have a core of people who are largely migrant in terms of trade work; they go to Alberta and other places and internally to Labrador to do hydro projects. So this is a culture which exists in this trade venue. They’re very capable and respected and renowned wherever we go. But the competence and proficiency of those tradespeople are second‑to‑none, mostly because the high standard required to actually build and construct to the offshore standards is much different than building a strip mall on Main Street.
This is high-tolerance steel and equipment that needs to last isolated for 30 to 40 years. It is something to be very proud of, and there has been a significant cultural shift here over the past 20 years or so that says we can do this, we can build these massive things and do it quite successfully.
I think this resonates everywhere. It’s in our universities. Cenovus just contributed $2 million yesterday as part of their celebration of the twentieth anniversary of the university.
I have a 19-year-old girl in engineering, and she worked with Exxon Mobil as a co-op student. It permeates everywhere. It’s our fabric.
[Translation]
Senator Youance: Thank you.
You describe a thriving industry that has positive economic and financial impacts on the province. However, I am trying to understand why an industry with such high potential is so dependent on public assistance, in a manner of speaking. Why is the province in debt, despite the deposits? What is preventing Bay du Nord from getting started? I am trying to understand why there is not a greater economic impact at the provincial level. Taking Norway as an example, is there anything that could be done to improve the industry’s impact?
[English]
Mr. Keating: In many ways, the answer resides in the resource base. So the resource base cures all ills and forgives many sins. What I mean by the resource base is simply this: To develop a stand-alone offshore field anywhere in the world, companies are targeting oil reserves of 700 million barrels or more. When Bay du Nord was first discovered, it was thought to be at that level, but through time, with additional drilling, we’ve had both some setbacks and some good news.
What’s happened is we discovered after 12 wells, or maybe 14 wells, the resource is not really contained in one pool; it’s sort of scattered in 15, 20 or 30 kilometres in many directions. The cost of tying back these things starts to grow, and the base field is now fairly modest. It may be in that 400-to-500-million-barrel zone, which is just on the precipice of being viable.
Most companies, like Equinor, have stated a measure of $45 U.S. per barrel as their economic threshold. And for the past number of years, Equinor has struggled to meet that. So right now, with their revisiting of their execution plans, the alignment on contracting and their different approach to phasing development, they’ve achieved that at least for the initial phases.
What’s important for me, though, is that the economic viability remains and we tap into these next two fields for tiebacks. That’s where the true upside exists. This is not between government or company. There aren’t even global issues, although they weigh on many decisions. It is simply the resource base.
We’ve had two wells drilled. Exxon Mobil drilled a well called Persephone sitting on a potential resource base of 1.5 billion barrels. I’m sure pretty sure that would be expedited and we wouldn’t be 13 to 15 years away, but rather 4 to 5. BP drilled a well the year before that called Ephesus. It sat on 4 billion barrels of potential resources. But when your chance of success on these massive fields is only 20%, you have a sense that we have to drill five, six or seven before we find the next one. I can say with a huge degree of confidence, these companies that will be exploring in our deep water are targeting billion‑barrel deposits. They are not looking at 400- or 500‑million‑barrel deposits. They will take them as neighbours to tie them in, but we are only looking for those deposits with a billion barrels or higher.
I have a 750-million-barrel cut-off with my team to tell me what’s exciting and interesting.
Senator D. M. Wells: Mr. Keating, in the Newfoundland offshore, many of the projects — perhaps all of them — have multiple owners and one operator. Can you tell us a little bit about the dynamic of ownership and the risk reduction in our offshore?
Mr. Keating: Yes, absolutely. As a matter of necessity, very few companies, even the biggest like Exxon Mobil, will undertake 100% of development. They seek partners for many reasons, primarily to share risks and the capital requirements. And then, of course, there is the benefit of the other companies’ expertise and insights, as the case may be. So joint ventures are the norm.
Typically, you bring the best of all these companies together in a non-operated way. My company is just one of them at a minority interest. We go in and share and debate and discuss best practice. That actually drives the level of safety and proficiency and all these good factors we see offshore.
On the downside, sometimes it does set up commercial impediments. In some cases, if you’re sitting on a block at 40% and with your neighbouring block you only own 10%, where are you going to drill the next well? Well, you’re probably going to drill it in your block, where you have the higher percentage, or at least that’s where your vote goes.
Sometimes that opens up differences of opinion among the field owners as to the pace and place of development. But that’s kind of normal. These joint operating agreements provide for different rules to navigate those uncertainties. But it’s largely unseen by the public. It’s unseen by governments, and probably little seen by regulators. It is vastly underappreciated, all the commercial positions that companies can have.
A case in point — if I’m going to tie back a 50-million-barrel field into Hebron or Hibernia or White Rose, I have to navigate a commercial construct that says what tariff I will pay for them to process my oil because I’m getting the use of that facility that they paid for over time, and there is a balance to be struck. Canada has a key role to play. It has a view to setting third-party access, for example, to break down the disproportionate interests that owners have to allow unfettered and certain access, for the greater good, really. The resource is for the benefit of the people. We want the owners to extract the financial incentive for it, but really we need to develop that.
Right now, we don’t have the level of maturity that we have in the U.K. north sector, the U.K. or Norwegian North Sea, where they’ve encountered this many times through the 1980s, 1990s and so on. We’re just starting to see it.
I’ll conclude by saying that while it is necessary that we have multiple parties on joint ventures to share the risk, it sometimes opens up commercial obstacles that are not technical or regulatory. However, there is a place for policy to adjudicate those imbalances to ensure we benefit and move forward appropriately.
Senator D. M. Wells: I want to go back to the question of gas. There is quite a bit of infrastructure required to be able to tap into that resource. Would you see the necessity of an onshore terminal or would you see it being a better option to have the liquefied natural gas specialty-built ships that could take it from the gas fields to the market?
Mr. Keating: That is a great question. My answer has changed through time, because 20 years ago, before the hydro projects in Labrador — Muskrat Falls and now potentially Churchill Falls — were in discussion, our island was isolated. We needed to find a source of new electricity, and a gas-fired power plant would have been high on the list of things to consider. In that case, we are thinking about importing LNG as a potential solution. At the end of the day, we have Muskrat Falls, and we tied into our connection points.
The utility for landed gas on the island is less in terms of local power generation because we have this huge hydroelectric endowment, and that’s a good thing.
Petrochemical potential is something we should evaluate, and natural gas has the ability to take streams and create a petrochemical industry. Having said that, the scale of the Jeanne d’Arc resource is not viable to bring to shore, and we do have pipeline issues with iceberg scour and so on. There are a bunch of technical hurdles that really impair the landing of the gas per se.
More and more, as I’ve come through this industry, views have evolved and gas markets have developed to where they are, it seems like a floating liquefied natural gas, or FLNG, solution may be the most efficient for Canada and for Newfoundland and Labrador because if you can put the gas in a ship offshore, it can go to any global market, no pipelines needed.
Even then, you have the option to bring that ship to our shore without a pipeline. You can create your benchmark petrochemical industry on the island. You at least have the option to do that. As technologies improve, as the wherewithal for FLNG evolves, that is more and more the right solution for our offshore.
Senator D. M. Wells: Thanks. In the production of oil from the fields that we have, gas, of course, comes up, water comes up and oil comes up. Gas is injected to produce more oil. This gas that is reservoired and eventually capped — does that give our offshore a competitive advantage, because we know the volumes, we know where it is and there are already wells drilled?
Mr. Keating: Yes, for sure. We have great certainty in understanding and knowing how much gas and where that gas is.
There is a little challenge in that once you take that gas molecule into the processing system and reinject it, it becomes harder to recover. So we will lose maybe 20% to 30% of the gas that we reinject, but we still have comfort and confidence as to where those resources are and how best to extract them. That’s an advantage.
You will see there are some significant discovery licences in and around the Jeanne d’Arc Basin, which are probably more gas-prone and that in past years have been passed over by the oil companies because they’re looking for oil. That’s where the ready market is. When we get to this phase of blow down where predominantly we are cycling gas and not readily needing it to produce oil, those prospects become more important from a delineation perspective where we’re perhaps going to look at gas.
I still have a great deal of interest in the government following up on its phase one natural gas survey to look not just at the existing STLs but in the Crown lands and all the productivity around the Jeanne d’Arc Basin. We need to build a gas case, set fiscal terms for it and set the conditions for investment. That is a priority for government, and I’m really excited and looking forward to helping them in that way.
Senator D. M. Wells: Thanks very much, Mr. Keating.
The Chair: Thank you, Mr. Keating. I have a favour to ask. There are three more questioners, and I’m just wondering if you have a bit of time beyond 9:00 to stay with us online.
Mr. Keating: Yes, 100%. This is the most important thing I can do.
Senator Lewis: Just to go back to the construction of the platforms, am I right in assuming it’s basically more like a shipbuilding exercise? You talked about Southeast Asia being a potential builder of new platforms. Does Canada have the capacity or ability to compete against Southeast Asia? Is that part of the reason why a company would look toward Southeast Asia?
Mr. Keating: Yes, that’s a great question. Southeast Asia simply has massive scale. It’s not the individual worker. An ironworker here and an ironworker there are probably as capable as any. I would probably put my money on the local ironworker, for example.
But when you think about the scale of the facilities — the dry docks, the lay-down areas, the erection halls, the cranes — that is a multi-billion-dollar investment built up to execute these things at massive scale. That’s hard to replicate. It is almost a structural advantage that they have, and it’s no reflection on a Canadian worker whatsoever. It’s simply the scale at which they produce things.
We do have some physical capacity issues. We’re still very interested in defence and what we can do on that file, but when you look at the dry dock facilities, the shipyard facilities, we struggle even to build our own navy vessels and so on.
When you look at these offshore structures, we really have put our emphasis on two things. The first regards the topside components that go onto these massive hulls. They’re like stick builds. You lift a building with a crane and put it in place. That we have done and intend to do.
The second regards these big concrete structures. But my signal on the concrete structures is this: Most of the world oil companies are looking in slope and deep water. You can’t build a 1,000-metre-deep gravity-based structure, or GBS. You can build a 100-metre one. More and more, we are looking to ship‑style facilities. There is still the interest in building topside modules, if you will, but it is hard to compete with Southeast Asia at scale.
From some of the studies and the insight I’ve seen, we are probably, per tonne, 60% or 70% less efficient compared to those Asian developments. And in terms of schedule, these folks lay these things out like LEGO blocks. We don’t have that physical capacity here. That’s not to say that we can’t do it, and it’s not to say that these oil companies can’t afford to address some of these real strategic needs in terms of jobs and employment. But it’s not endless. That’s some of the tension that exists between us right now.
I’ll even say this: Norway has an established history and capability of building offshore structures, but more and more, Norwegian facilitates are being built in Asia. If you were to Google some of their conversations, they are exactly the same. Norwegian unions and shipyards are very disappointed that even their state-owned companies are tending to do things in Southeast Asia. We’re not immune. Even far-more-sophisticated or at-scale European yards are losing out to Asia.
Senator Lewis: I have another quick question about LNG shipments and so on. I assume that Newfoundland would have a geographical advantage over the United States as far as proximity to Europe.
Mr. Keating: I can give you that almost specifically. In my study work from the past decade, I compared the Cheniere LNG hub in the Gulf Coast to some community in the Avalon Peninsula here in Newfoundland. It could be as much as 50 cents to $1 transport tariff difference in the sailing cost time. So that could be 15%- or 20%-per-MMBtu advantage to have a facility here.
Folks take for granted that we’re closer to the U.K. and Ireland than we are to Manitoba, and we are hanging out in the Atlantic Ocean. So we have this logistical and tactical advantage in terms of shipment, not only of our oil by practice but, yes, in the future, LNG.
Senator Lewis: Thank you.
Senator Fridhandler: Thank you, Mr. Keating, for your enthusiasm about the industry in Newfoundland.
You’ve cited a few examples of why things aren’t happening both at the exploration and the development phases here. Might I suggest to you that it’s the fiscal regime that is an issue as well — not simply that you should be competitive with what is happening in the rest of the world, but that you have to be a bit better if you are going to get things to happen? It’s all about money.
Mr. Keating: Yes. I would accept that. At the end of the day, when the oil companies do their modelling and look at the fiscal, economic rents — that’s a fancy way of saying all sources of government take — they will stack us up and compare against other jurisdictions.
Our government’s primacy is to design the fiscal systems, and they are often in discussions with consultants globally that keep apprised of where governments are. In the U.K., they have the windfall tax, which basically drove actors out of the U.K. Actually, my phone would start to ring, but unfortunately, I have yet to see those companies materialize here. However, countries usually manipulate their fiscal systems on a go-forward basis — usually not retroactively, because that’s fatal — constantly.
Newfoundland and Labrador put in place what is called a progressive royalty system, meaning that even in the case of the Hebron project, there are very few royalties coming out of that project in the first four or five years, because it is basically 1% flat fiscal take. It only steps up based on a volume trigger after a certain volume is produced, and then at payout when you get into the higher levels of fiscal take.
As I mentioned, there is a balance to be struck. We don’t want to give oil away, because it’s to the fiscal benefit of Canadians, but we have to make sure that as a fairly immature frontier area we’re not predatory or exclusionary. That’s a good question, and it’s second only to the rocks. Are there oil and gas in the hills? You have to have that first. If you have that, the next question is this: How much I owe you for it? What is the fiscal system?
Second, what are my obligations and regulations? As you step down through all the different decision processes that these companies make, my job is to chase and pick up wherever these balls may be falling out of balance and advise my government to see what we can do to fix it. We’re in the middle of that right now with the Bay du Nord project.
Senator Fridhandler: You talk about the rocks and what’s in them. You were enthusiastic about what’s out there. There has been exploration that hasn’t been brought on stream, both the oil and gas, and there’s a tenure to maintain that over time without having to produce it and lose your rights. Are you able to provide the committee with the public data on what’s been discovered and what otherwise is believed to be there so we can get a sense of what’s at play?
Mr. Keating: Certainly. I can make that available. I can’t cite numbers off the top of my head here today, but I absolutely can do that.
Senator Fridhandler: You also appear to be a lone wolf out there promoting Newfoundland. What is the federal government doing? There’s something in it for them. We are a federal committee. What can we urge the federal government to do to help you shake the trees?
Mr. Keating: I always view the federal government as my partner. That’s the nice way of saying it. They do facilitate. I had international trade and investment folks from Global Affairs Canada in here just the other day, and they offered to assist us and set us up in different capitals that we visit from time to time, to meet trade officers and so on. So there is this apparatus that exists, and it’s great.
If I had to put my finger on it, though — hopefully I’m not offending anyone — I would say that when you’re the primary resource beneficiary, the royalty taker, you have a strong driver to staff up, put your head at it, put your arms around it and chase it. The federal government is mostly an administrator in this role. It has a corporate tax, but this is a general application. It taxes everything. There doesn’t seem to be in the halls of Ottawa this sense of championing the offshore. There are plenty of competent and knowledgeable people with respect to the offshore, but I don’t see them at the conferences where I go. I do see other governments — the U.K. government, the Guyanese government, the Namibian government and the American government — whose officials at fairly senior levels are making speeches with specifics to offshore.
In Canada, we are very much still dominated by a Western Canada focus, and we do have a lot of mostly bilateral discussions with our neighbours to the south because that’s the kind of market we’re in. But I would love to share a platform with my federal colleagues in terms of promotion and a strategic approach to how we can look at best practices and other jurisdictions, because I find myself doing a bit of that work and then forcing up into a government that analysis instead of the government working with me to arrive at the same outcome. I feel as if I’m always set up for a negotiation. I’m negotiating with the federal government for better terms, better regulation or better policies when in fact I should be a partner to decide and determine the best apparatus that surrounds this offshore so we can create foreign direct investment opportunities.
Senator Fridhandler: Thank you. I have one more question to clarify something you said earlier. When we were talking about uncertainties faced by the companies looking at working in the Newfoundland offshore, aside from the emissions cap, you mentioned that there was uncertainty around the potential for marine preservation and marine protected areas. I thought that this would be dealt with at the stage where there is a determination about what’s going to be put out there for exploration licences so that if it is a sensitive area, there is not even going to be a call. But once you receive the call, other than normal course protection of marine environment in the areas that you’re drilling or that you’re going to automatically produce, that’s largely been settled. Can you clarify the degree of uncertainty that goes into this?
Mr. Keating: Yes, 100%. I would agree with what you just said. That’s how I would also expect it to work. However, from 2021 to 2022, the ambition for the federal government to set a 30% target for the oceans was a broad approach to say which areas are sensitive — in particular, the benthic seabed populations and salmon migratory pathways. There is a whole host of environmental prerogatives that the federal government needed to examine, and as part of that natural consultation, you can sit down and find that 100% of our oceans probably need some degree of protection, but there has to be a balance, so we arrive at 30%.
In the oil and gas business in particular, from my perspective, to know where the resources are, I’m hopeful that the best prospectivity would not be where the most sensitive marine populations are. For the most part, that is the way it is. So I go along in my job, blissfully hopeful that they don’t coincide, but we need to be respectful that if we can’t produce in a particular area because of an environmental concern, we won’t and we shouldn’t. But here is the rub: A unilateral decision can be taken without much science, because most of the discussions we felt in 2021-22 included broad science but not specific science. I crystallized it in a meeting that my colleagues were called to, where an official from government took out a map of the offshore, and they had a big ovoid across basically 30% to 40% of the productive area. They said that Canada is considering this area as a potential marine protected area and that they await our comments and concerns.
I will guarantee you that everyone in that room from the oil and gas offices called their head offices in Houston or Oslo or London, as the case may be, and said, “You know that licence we just acquired? A map I have shows a potential marine protected area.” They live in constant tension that at some point, some decision may be taken that may cause those licences to be forfeit or go back to the state. That’s real. That’s a factual circumstance.
From 2021-22, that had a chilling effect, and it keeps coming up. I think there is a better dialogue now. There is more maturity in terms of how both the provincial and federal governments and officials at all levels talk and communicate around which areas should be approved for marine protected areas, and the industry is kept apprised. I think that is a system that works well.
But I think the ability of a unilateral decision to strike a collection of offshore licences does exist, and that causes a bit of fear.
Senator Fridhandler: That’s essentially expropriation in hindsight and is probably compensable to the companies, but I hear you.
Mr. Keating: Yes.
Senator McCallum: Thank you, Mr. Keating, for all the information you’ve provided.
You said the resource base is very important and that the exploratory phase is currently unsuccessful. You need to explore six to seven areas to find the needed resource base, and at the beginning you said you had wanted to have 15 to 20 exploratory projects.
When you have finished, and if these exploratory sites have not produced the needed resource, what happens to — and I don’t know if this is the word — decommission all these sites?
At the same time, at the end of the life cycle of an offshore facility, what is involved in decommissioning the facility, and what are the best practices? What are the social and environmental implications of decommissioning offshore energy resource facilities and these exploratory sites? Because if you’re doing that much drilling, it’s a very dynamic area, and you’re constantly producing — I don’t know if “issues” is the word — of concern.
Mr. Keating: Yes. To speak about the exploratory projects, when you drill a single well, picture this: It fills a space and has a direct impact that equates to the size of a tennis court.
Now, you can go out a few hundred metres beyond that, and sometimes that’s where the drill cuttings that you take from the ground are deposited. Of course, there is preparation and acceptance of where these piles are going to be laid, particularly in a benign area and so on and so forth.
After a three-month project, which is typically the duration of an exploratory well, you will be left with an abandonment, where you plug and abandon. You pour concrete down the well, you seal it and you test it to ensure there are no leaks, there is no gas and that the well is dormant.
What you’re left with is, effectively, a steel pipe 9 or 10 inches wide, capped and sealed in perpetuity with cement or concrete. There are tens of thousands of these around the world right now, and the frequency of problems you have where you have to go back in and remediate or fix these things are 10-4. It is very rare that you need to go back and deal with any of these.
What you’re left with, for the most part, when I say that there is a one in four chance, so 75% of these exploration wells — if we drill 20 wells, 15 of them would just be left as a pipe in the ground and basically a pile of mud that would effectively form part of the seabed and, as it has, attract marine life and coral.
Then getting to the success cases, when you have a field development, and you may have 20 or 30 wells, and particularly in subsea cases, you get to a situation where after your 30-year or 40-year productive life, the field needs to be abandoned. What we mean by “abandoned” is, for sure, everything that floats on the surface is gone. They disconnect all these flow lines, which is basically a spaghetti of pipelines, umbilicals and communication systems. That ship is retired, probably repurposed in some other jurisdiction or broken apart, as the case may be, and all this stuff is removed from the offshore.
What you’re left with then is usually what is called a drill centre, a template steel frame, maybe the size of a two-car or three-car garage and where maybe six or eight wells would have been collected in one centralized location. They are stripped of all material and all fluids, and those wells are capped.
What you’re left with then on the seabed are the wellheads themselves, and in some cases, we even remove the templates — the steel frame. But for the most part, the steel frame is immaterial, and it, too, through time, as we’ve seen with abandoned fields in the Gulf of Mexico and the North Sea, attracts marine life and becomes part of the setting.
When we talk about abandonment, these oil companies set aside hundreds of millions of dollars for that period in 30 or 40 years, and it is part of the regulator’s job and part of the provincial government’s job to ensure that that phase is well funded and companies don’t simply walk away and neglect it.
We’re fortunate, because of the type of companies we have and their sophistication, that they clean up after themselves.
We haven’t had any abandonments in offshore Canada yet, and companies are busy trying to extend field life to prolong it and make their initial investments more economical. But I’m comfortable that these companies are well financed and have set aside funds internally or cross-pledged among ourselves through our operating agreements and our mutual commitment to fund the abandonment of these fields. I think it’s going to be done in world-class ways. That’s been well established and documented elsewhere.
Senator McCallum: Thank you.
The Chair: Before we adjourn, I just have one quick question. It has to do with my home province of New Brunswick. You stated at the first that there wasn’t oil going from Newfoundland, generally speaking, to the refinery in Saint John, and I’m wondering why.
Mr. Keating: Yes. It’s very much market-based, and it takes a willing buyer and a willing seller. We had a period over six or seven years when some reasonable volumes were sent to New Brunswick.
I think through the ebb and flow of both what that particular refinery needs and what feedstock it relies upon and requires and, of course, then the quality and the type of oil that we produce, you will get a change.
What happens is, of course, you look at the motivation of the sellers in Newfoundland. The sellers want to get the highest price, so we’ll sell our oil to the highest bidder anywhere in the world, because it’s in a tanker, and we are very fortunate to get, sometimes, premiums to what these published oil prices are.
Now, if you’re a refiner, you’re not interested in paying the highest price. You want the best value or the lowest price of feedstock so that when you break it down and sell the subcomponents, you have a margin. They’re not often in a line.
My suggestion is that both parties are very happy in terms of the businesses that they’re in, but I do believe, though, in terms of Canada being able to be completely energy self-sufficient as well as security of supply, it’s great knowing that we have an oil refinery in Saint John, that if we needed to, we could use it for the benefit of Canadians, and I think Canadians need to know that we have oil at tidewater that we can export and get to the highest markets to the most in need regimes and jurisdictions. I think that’s a great duality to have.
Every now and then, we cross over and meet commercially, and sometimes we don’t.
The Chair: Thank you, Mr. Keating, for being with us this morning. You have been a very informative witness and spent more time than you had initially planned. We’d like to thank you for your information and wisdom.
(The committee adjourned.)