Tuesday, April 23, 2024

No guarantees when drilling for oil

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THE WORD EXPLORATION adequately defines Barbados’ effort to wet its feet in the offshore energy arena.

Even after signing two licences with Government recently – permitting it to begin work on two blocks in Barbados’ territorial waters – Australian energy giant BHP Billiton is not assured of finding hydrocarbons in the area. That is generally the nature of exploration – no guarantee.

In fact, there is no certainty that the company will reach the stage of drilling, since its agreement with the Freundel Stuart administration gives it the option of ending the exercise if its first three years of seismic surveys are not encouraging. This means that by 2018 Barbadians should know if Government’s hopes of a major oil and gas find is reality.

What is clear is that even if BHP Billiton and future licencees do not reach the stage of applying for production licences under Barbados’ offshore petroleum legislation, which includes the Offshore Petroleum Act and Offshore Petroleum Regulations, Government will be earning revenue from various fees and the monetary support for training it negotiated.

Under the section dealing with minimum annual training expenditure, the Offshore Petroleum Regulations specify that BHP Billiton as an exploration licencee will have to spend $200 000. The regulations also mandate that for the extension of an exploration licence under minimum training expenditure the amount is another $200 000, while for a production licence it is $400 000 and the same amount for an extension of production.

Barbados also has a schedule of application fees for various categories of work related to the offshore oil sector.

These included application for an exploration licence ($5 000), application for a production licence ($10 000), application for approval to transfer a licence ($4 000). There are also provisions for the payment of minimum annual coastal and marine environment research fees for the exploration licence ($100 000), extension of exploration licence ($100 000), production licence ($200 000) and extension of a production licence ($200 000).

Then there are the administrative penalties for contravention of various rules such as failure to submit a joint operating agreement when required ($25 000), failure to submit an exploration report when required and relinquishment of the exploration area in a manner inconsistent with the regulations ($25 000).

Based on its size and financial strength, these monies are akin to a drop of oil in a barrel for BHP Billiton. The company, which holds a 45 per cent interest and is the operator of the Angostura oil and gas field off neighbouring Trinidad and Tobago, has a US$600 million exploration budget and in its petroleum arm’s 2014 annual report, president Tim Cutt said its petroleum business “delivered record production of 246 million barrels of oil equivalent”.

However, like its competitors in the oil exploration and production industry, low oil prices have hurt the overall group’s profits in the last year. In February, the company reported that its half-year profit was US$4.27 billion, a 47 per cent reduction attributed to “slumping commodity prices”.

Additionally, two weeks ago, BHP Billiton group chief executive officer Andrew Mackenzie, said petroleum exploration expenditure up to the end of March was US$393 million. Total petroleum exploration expenditure for the 2015 financial year was expected to be US$600 and “remains focussed on the Gulf of Mexico, Western Australia, and Trinidad and Tobago”, he added.

It has not been all smooth sailing for the company, though. Last week, Standard & Poor’s announced its downgrading of BHP Billiton’s credit rating outlook because of concern about plunging iron ore and oil prices and the company’s dividend policy, which was considered generous. The outlook was changed from “stable” to “negative”.

“The outlook revision reflects our concerns that continued weakness in commodity prices, combined with BHP Billiton’s commitment to a progressive dividend payment, may weaken the company’s key financial metrics to below our expectations for the A+ rating without offsetting measures by the company,” S&P credit analyst May Zhong said.

None of this is expected to affect the Barbados operation, which is in its infancy and is just a small part of what BHP Billiton is doing in the region and wider world.

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