Cablegate: Atlantic Canada: Offshore Energy Exploration Costs Becoming

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DE RUEHHA #0120 1742025
ZNR UUUUU ZZH
P R 232025Z JUN 06
FM AMCONSUL HALIFAX
TO RUEHC/SECSTATE WASHDC PRIORITY 1033
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
INFO RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
RUEHOT/AMEMBASSY OTTAWA 0377
RUEHHA/AMCONSUL HALIFAX 1100

UNCLAS HALIFAX 000120

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FOR WHA/CAN
DOE FOR K. DEUTCH

E.O. 12958: N/A
TAGS: EPET ENRG ETRD CA
SUBJECT: ATLANTIC CANADA: OFFSHORE ENERGY EXPLORATION COSTS BECOMING
PROHIBITIVE?

1. Although there have been some major strides in reducing
regulatory delays and costs for offshore energy exploration,
most drilling expenses for companies looking for energy off
Atlantic Canada are outside of the control of regulators, the
Chair of the Canada-Nova Scotia Offshore Petroleum Board told a
June 23 meeting of The Energy Council. Diana Lee Dalton
described for the group, which is meeting in Halifax for the
first time, some of the challenges in containing expenses of
offshore drilling operations. The bottom line: looking for
energy offshore Nova Scotia or Newfoundland-Labrador currently
costs approximately C$100 million per well.

2. The main culprits in the rising costs, Dalton said, are
drilling rig rates and wages for offshore workers. There are
only six to eight rigs in the world winterized and with dynamic
positioning that are capable of working year-round in the harsh
North Atlantic conditions. Rates for these rigs have spiraled
in recent years, to around C$480,000 per day. Most wells
offshore Atlantic Canada require at least 100 days to drill.

3. Dalton noted that regulatory approval times for exploratory
drilling have dropped significantly, to between nine and 13
months, down from the 18 months that it took to approve
exploratory drilling for the Sable gas project off Nova Scotia.
Labor rules that mandated complete crew changes when a vessel
moved between Newfoundland and Nova Scotia waters have been
eliminated, as have duty charges on drilling rigs that had cost
an estimated C$1 million per well. All of the cost savings from
that substantial regulatory improvement, however, have been
subsumed by drilling rig rates that have risen by 100% over the
last few years.

4. COMMENT: Energy exploration companies have frequently told
us in recent years that the costs of looking for energy offshore
Atlantic Canada are so high as to almost negate the area's main
advantage -- proximity to the U.S. market. With only one in six
exploratory wells actually turning out to be successful,
exploration companies are now looking at C$500 - 600 million
just to find a producing well. These kinds of costs blunt the
competitive advantage that the Atlantic Canada offshore has,
even with oil at US$70 a barrel. Nova Scotia has been
particularly hard-hit -- recent wells have not been successful
and firms interested in exploring offshore have been looking
increasingly to Newfoundland-Labrador's Orphan Basin. END
COMMENT.

HILL

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