Ken Hull, President, Hibernia Management and Development Company Ltd.
LEADING A NEW INDUSTRY INTO A NEW CENTURY
Chairman: David Edmison
President, The Empire Club of Canada
Head Table Guests
Alex Squires, Security Analyst, Brenark Securities Ltd. and a Director, The Empire Club of Canada; Marc Rigaux, OAC student, Oakwood Collegiate Institute; The Rev. Dr. Harrold Morris, Past Moderator, Presbyterian Church of Canada and President, St. Andrew's Society; Peter Kent, Anchor, Global News; Allan Bonner, President, Allan Bonner Communications Management Inc.; David McFadden, Partner, Smith Lyons Torrance Stevenson & Mayer; Monty Larkin, C.A., Honorary Director, The Empire Club of Canada; Duncan Mathieson, Analyst, Gordon Capital; Peter Watkins, Managing Partner, Eastern Canada, Ernst & Young; and Michael O'Leary, Managing Director, CIBC Wood Gundy, and Executive Vice-President, CIBC.
Introduction by David Edmison
Throughout the ages, oil has been a precious commodity. Ancient Crete became rich in 2500 BC exporting olive oil. Plato later bemoaned the changes to the Attic landscape which suffered erosion due to excess planting of olive trees. The sources of oil have changed over the years and in the late 16th century Basque fishermen hunted off the coast of Newfoundland for whales to extract whale oil used in lanterns. Now there is another search in progress off the coast of Newfoundland and it has nothing to do with whales.
The Hibernia oilfield was discovered in September 1979, some 315 kilometres from St. John's Newfoundland in 80 metres of water on the Grand Banks. It is estimated to contain two billion barrels of oil of which 615 million barrels are expected to be recovered. The projected life of the project is estimated to be 19 years, based on 125,000 barrels per day of production, or approximately 10 per cent of Canada's crude oil output. In short, this is one significant find. The rewards could be high but the stakes could be higher as the project is estimated to cost over $6 billion. The funding has come from a consortium of companies including Chevron, Mobil, Murphy and Petro-Canada as well as the Canadian and Newfoundland governments.
The Hibernia project is expected to begin production in approximately two years' time. This will mark the culmination of 25 years of exploration and pre-development engineering. The Hibernia Gravity Based Structure is the first of its kind and was designed to resist the impact of sea ice and icebergs weighing up to six million tons. After all, when you're building an oil platform the size of several football fields and as high as a 59-storey building in an area known as "iceberg alley," you can't be too careful. This project is a major technological achievement and already several companies involved have used their new-found skills to bid on and win contracts for major oil and engineering projects both in Canada and internationally.
With us today to talk about this fascinating project is the President of the Hibernia Management and Development Company, Mr. Ken Hull. Our guest grew up in Saskatchewan and got his start in the oil patch working for Mobil as a battery operator. He has a Bachelor of Science degree in Petroleum Engineering from the University of Wyoming. Before joining the Hibernia Project, Mr. Hull was Vice-President in charge of all Mobil's frontier development in Canada.
He is no stranger to off-shore development. In 1979 he worked in Norway on the Statfjord project and in 1990 he was appointed Producing Manager for Mobil's North Sea operations, after stints in Indonesia and New York.
The Hibernia Project is one of the most ambitious engineering and construction feats ever undertaken in this country, and indeed the world. I've no doubt it has tested the metal of every one involved. Its success will rest to a large extent on the persistence, experience and leadership of our guest today.
Ladies and gentlemen, would you please welcome our honoured guest, the President of the Hibernia Management and Development Company, Mr. Ken Hull.
Compared with your venerable Empire Club, the new and exciting Hibernia oil development, which I'm here to tell you about, is just a brash youngster.
However, long before the Hibernia oil field was discovered--and in fact even before The Empire Club was established--the name "Hibernia" was linked to Newfoundland and changing times.
In the latter half of the 19th century the S.S. Hibernia was busy laying the undersea cables that revolutionised long-distance communications between North America and Europe. Now, as the 20th century draws to a close, the name "Hibernia" is again a symbol of advancing technology in the rough waters of the Atlantic.
I am referring, of course, to the offshore platform we are building to produce oil from the Hibernia field, which lies near the Grand Banks, south-east of St. John's. Our Hibernia is so big in terms of physical size, cost and benefits that it is sometimes difficult for people to fully appreciate what's going on.
From the start, we have generally found public reaction to the development to fall into three categories:
• In one group are those who have considerable knowledge of Hibernia and understand the challenges and opportunities that it presents.
• Another group knows little about Hibernia and is generally neutral.
• The remaining group includes sceptics and critics who regard it as some sort of publicly funded mega-project which the country can't afford.
As we get closer to producing our first oil next year, there is, I'm happy to report, a noticeable thinning in the ranks of the critics and sceptics. Thanks to the efforts of everyone involved in the development, Hibernia is at last emerging from the fogs and mists that all too often blanket Newfoundland, ready to become one of the great success stories of Canadian business.
We Canadians owe a lot to our forebears for their vision, hard work and faith in this spacious but challenging land. A former Governor General, Lord Tweedsmuir (John Buchan), pointed out: "We can only pay our debt to the past by putting the future in debt to ourselves." We believe future generations will approve of our six-billion-dollar investment. Hibernia is Canada's fourth-largest oilfield and will eventually produce about 10 per cent of the country's light oil. In terms of electrical energy, that's enough to feed a city the size of Toronto for about 38 years.
But the sceptics may be surprised, and critics confounded, when they discover that most of our capital came from private, not public, funding. The actual ratio was 87 per cent private to 13 per cent public. Frankly, we are somewhat puzzled why anyone would think private investors would put so much money into a development if they weren't reasonably certain of making a profit. Wood Gundy has concluded Hibernia's owners can expect a return of about 13 per cent on their investment. That is a significant improvement on returns generated by the oil industry's upstream operations in Western Canada during the last decade.
We set out from the very beginning to use technology and ingenuity to be as profitable as possible for our stakeholders, both public and private, without compromising safety or the environment. These efforts have allowed us to reduce the cost of extracting a barrel of Hibernia oil to between $12 and $14. On the slight chance there are still a few sceptics in the room, let me just note that the current market price of light crude is $18-19 a barrel. We can't do much about the market price but we can control our operating costs. The greater the difference between those figures, and the more oil we can produce, the greater the returns.
That is only part of the Hibernia story--because Hibernia is not just about oil and technology and profits. It is about people; about their way of life and their future. The fact is, the business and technical skills demanded by a project of this size will be paying dividends to the people of Newfoundland and Canada long after the Hibernia oilfield has run dry. That's what I really want to talk about for the next few minutes.
Because of our history and geography and our exposure to American pop culture we all know that pioneers generally either come from, or are on their way to, the West. As a Westerner myself I don't have any particular quarrel with that image, but I guess I have to admit that things have changed--and these days pioneering isn't just a matter of geography. If they could be with us today, I don't think there's any doubt the people who opened up the West, built our railways and established our communications networks would have any difficulty in recognising the pioneering nature of the Hibernia development. Did you know it has been only 50 years since the world's first offshore oil platform began operations--and that was in a mere six metres of relatively calm water in the Gulf of Mexico. Today, there are platforms operating in seas, gulfs and oceans around the world.
Most of you, I'm sure, are aware of the extensive oil and gas fields under the North Sea and the impact the development of those fields has had on the global energy picture. We tend to forget that the North Sea industry has grown far beyond anything envisaged when the fields were first discovered. Looking just at the U.K. sector of the North Sea, oil production was already well advanced by 1979, the year Hibernia was discovered. At that time, there were some 35 companies and 25 platforms producing oil and natural gas liquids worth more than $11 billion a year. By 1994, the number of companies, platforms and the value of production had all nearly doubled.
I am not predicting that Newfoundland's oil fields will one day rival the North Sea's. What I am saying is that our industry has a wealth of knowledge and experience in this area--and that experience is available to us as we develop our own offshore industry and prepare to lead it into the next century. We have tall shoulders to stand on. Our parent companies between them have years of experience operating in the world's major oil-producing areas.
One comparison I'd like to make concerns the depth of water in which we operate. The Hibernia platform will stand in 80 metres of water. That's quite different from the shallow waters of the Gulf of Mexico--but it can't compare to the 300 metres of water in which some North Sea platforms stand. Still the Hibernia platform is unique in its own way. It is the only one in the world designed to withstand the impact of icebergs weighing as much as six million metric tonnes. Now the chances of such an encounter are extremely remote. Scientists say we can expect to see an iceberg that size near the Grand Banks once in 10,000 years. But that will give you an idea of the kind of preparation and attention to detail that is characteristic of Hibernia. While the construction of Hibernia represented a considerable business risk, we have always taken the position that it won't be a risk to human life, or the environment.
Before I go any further, let me give you some idea of the size and complexity of a structure that "Time" magazine calls "The Eighth Wonder of the World." When it is finished it will stand 220 metres high--that's nearly one and a half times taller than this 43-storey building--and will weigh close to three quarters of a million tonnes. It has two main parts. There's the concrete base with its serrated ice wall, in which we can safely store more than one million barrels of oil; and there's the superstructure (we call it topsides), containing the working and living accommodation, two drilling rigs, cranes, a flare boom and helideck. In constructing the base, we used a technique known as slip-forming, a continuous process of positioning reinforcement steel and pouring concrete. Some of you may recall a similar technique was used in building the CN Tower, but our platform is a lot more complicated. Imagine pouring concrete simultaneously for four CN Towers, over an area as large as a football field. Then further imagine the logistical and human challenge of performing this operation 24 hours a day for up to 50 consecutive days--at a work site floating in 200 metres of water and in Newfoundland weather.
In about a year's time, the base and the topsides will be mated and the entire structure towed more than 300 kilometres out to sea--about the same distance as the crow flies from here to Ottawa. It will be a defining moment for Hibernia and for Newfoundlanders. As it happens, 1997 is the 500th anniversary of John Cabot's first voyage of discovery to the area. A replica of his ship the "Mathew" will be in the vicinity as the Hibernia platform is towed out--a reminder of the past and a glimpse of the future.
From the beginning of the Hibernia venture, we promised that most of the capital would be spent in Canada and most of the work would be performed by Canadians. We have made good on those promises. So far we have spent more than $4 billion, of which $3 billion has been spent in Canada and, not just in Newfoundland. About 100 contracts worth more than $1 million each have been awarded to companies outside Newfoundland. About 40 of those went to companies right here in Ontario. During the height of construction last year almost 7,000 people were employed on the project, 6,000 of them in Newfoundland.
As I said a few moments ago, Hibernia is more than just the sum of its sizable parts: it represents a unique blend of visionary business, engineering, technological, and environmental know-how. This stems, in part, from the diversity of our owners--oil companies such as Mobil, Chevron, Petro-Canada and Murphy--and the federal government. While that may remind some of you of the old joke about a camel being a horse designed by a committee, it has been extremely fortunate for us. We have had the freedom to design and create a management philosophy from scratch. We have drawn on the lessons learned by our parent companies and other successful companies across the business spectrum, from aerospace to communications technology and software. In addition, we have experienced people from all over the world--Norwegian, Dutch, American, French, British and others--each with their own national culture and work ethic. Providing leadership and focus for such a diverse group can be quite a challenge. Just look at the complex inner-workings of big international organisations like the United Nations. In Hibernia, we see excitement and enthusiasm for a promising new industry and a determination to set the highest possible standards for that industry--a mood that is captured in Hibernia's vision: "People Pioneering Offshore Excellence."
By the turn of the century, Hibernia will just be hitting its stride. We will be producing, on average, between 125,000 and 135,000 barrels of oil every day. The oil will be transferred from the platform to refineries in specially designed shuttle tankers with double hulls and state-of-the-art safety systems. I stress this because, just a few weeks ago, we again saw the sad spectacle of a fouled shoreline and oil-covered wildlife caused by a tanker running onto the rocks. The double hulls of our vessels are especially designed to limit oil leaks in the event of accidents. To provide an extra margin of safety and caution, we have developed the most advanced on-shore simulator to train our offshore personnel, in the same way that airlines use simulators to train their pilots. This is the kind of forward thinking and expertise we want Hibernia to be known for, not just in Eastern Canada, but in offshore developments around the world.
Being a pioneer and industry leader is never easy and of course you often have to bear the additional costs of putting infrastructure in place. We want to ensure that we get it right, and that we get it right the first time. Those who come behind us will benefit and--you can trust me on this--they are coming.
Approval for development of the Terra Nova field is expected soon. Other significant offshore discoveries--including Hebron, Mara, Whiterose and Nautilus--could be developed with support from the infrastructure that will soon be in place at Hibernia. We believe that advances in technology will allow the Hibernia platform to play an important role in the development of other fields. If we add in the likely discovery of new fields on Newfoundland's west coast, we can begin to see that Eastern Canada is on the verge of acquiring its own oil patch. Thanks to Hibernia, we have the know-how and a pool of experts and skilled workers to make it all happen.
The fact that in Hibernia's case it all came together was due in no small part to the active co-operation and interest of the provincial and federal governments in St. John's and Ottawa. It is a hard economic fact of life that big, capital-intensive projects like Hibernia require supportive and stable fiscal regimes, in which to develop and come to fruition. Quick-fix politics don't help when you have to make long-term investments and long-range judgments. Just consider:
• It has been almost six years since we began the construction phase.
• It has been 17 years since the discovery of the Hibernia oilfield.
We are convinced it has been worth the effort. No doubt Hibernia will stand as a monument to late-20th-century technology. But it will also serve as a useful guidepost to the way large business and engineering projects will evolve in the 21st century. Partnerships with governments and strategic business alliances have played a major role in our development and they may well be the keys to the future for Canadian companies who want a bigger slice of the world business pie.
In closing, just let me state what I hope by now is obvious: that all of us involved with Hibernia take great satisfaction at what we've accomplished. We still have a way to go, but we are on schedule to produce "first oil" by the end of next year.
Naturally, we are proud to be building the "Eighth Wonder of the World." In addition to being an engineering marvel, our Wonder of the World--in spite of what a dwindling number of nay-sayers and sceptics believe, and in contrast to the first Seven Wonders--will make a profit.
Almost as important as that profit, however, is the new sense of confidence that is becoming apparent in Newfoundland. Because of Hibernia, Newfoundlanders are raising their sights.
Some local companies have already been able to use their practical experience with Hibernia to bid for and win contracts on other oil and engineering projects both in Canada and internationally. This is the sort of drive and initiative that companies all over the world are struggling to acquire as they head into the highly competitive and cost-efficient global marketplace of the next century.
This changing mood was reflected in a front-page story in The Globe and Mail last week with the headline: "Newfoundland swaggers to Hibernia's beat." In my view there is no reason why that confidence--or for that matter, the swagger--should be limited to Newfoundland.
The 90s have been tough years for business, for governments and for individual Canadians as we have all had to face up to the harsh economic realities of the age. Canadians' self esteem and confidence have been battered--so much so that many people now have difficulty recognising success when they see it. We are recognised in Newfoundland as an emerging success, but now I'd like to challenge you to take a closer look at what we have accomplished, because I'm confident that, no matter how you judge us, you will agree that Hibernia is going to be an achievement in which all Canadians can take considerable pride. It will continue Canada's tradition of paying its debts to the past by creating something of value for the future.
The appreciation of the meeting was expressed by Monty Larkin, C.A., Honorary Director, The Empire Club of Canada.