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Financial Post (Canada): Chevron pulls drilling rig off Nfld. coast: Committed to Mexico

Published: Mar 28, 2007

CALGARY – A Chevron Corp.- led consortium exploring for oil in the Orphan basin, a new area in rough waters 400 kilometres off Newfoundland, has postponed further drilling after its first well took months longer than planned and costs soared to an estimated US$200-million, making it one of the most expensive in the world.

The move is yet another setback for Danny Williams, Premier of Newfoundland and Labrador, who wants to increase provincial revenue from oil development and take equity stakes in projects.

Exxon Mobil Corp., one of the well’s partners, said it is redeploying the rig, the Eirik Raude, to the Gulf of Mexico to drill one of its own prospects.

The consortium, which also includes Imperial Oil Ltd. and Shell Canada Ltd., had planned to drill two more wells this year in the Orphan Basin, an uncharted area estimated to contain between six and eight billion barrels of oil.

But drilling of Great Barasway, which started last August, took twice as long as expected.

The well, drilled in nearly 2,400 metres of water and aiming for a total depth of about 7,200 metres, was supposed to be finished before Christmas.

Instead, it’s only now wrapping up, partly due to a flurry of mechanical problems at the rig, including a leak that required it to be moved to Marystown for repairs.

The delay boosted the cost of the well to US$200-million, industry sources said yesterday, from an earlier US$140-million estimate, which itself would have been a Canadian record.

The Eirik Raude, one of the world’s largest rigs specializing in deep-water drilling, costs about US$1.5-million a day.

“Our experience reinforces the high-risk, high-cost nature of exploration in that area,” said Exxon Mobil spokesman Alan Jeffers. “It really does require high levels of technical and financial capability to explore for and produce in those harsh environments.”

A spokesman for Chevron, the lead partner with a 50% stake, said the well is a “tight hole” and wouldn’t reveal whether it found oil. The company also wouldn’t reveal the well’s costs, saying the information is proprietary.

Drilling in the basin may resume in 2008 or 2009, but there are no firm plans at this point.

“We are optimistic and hopeful that we will get to do more exploration work in the Orphan Basin, but now we need to sort out some things in terms of [finding] a rig and when,” said Chevron spokesman Dave Pommer.

Last fall, a Shell Canada executive said a single well could not tell the whole story of the basin, but also that Great Barasway would either be encouraging or discouraging.

The prospect is 390 kilometres northeast of St. John’s and 250 kilometres north of the Hibernia oil project. It is so remote it can only be reached by long-range helicopters.

The delay means there won’t be any more exploration drilling in Newfoundland’s offshore this year.

ConocoPhillips, which was expected to explore in the Laurentian Basin, postponed its plans until next year because it was unable to line up a rig, of which there is a shortage worldwide. Husky Energy Inc. isn’t drilling an exploratory well in the Jeanne d’ Arc basin this year, as had been speculated.

In addition, the sector recently lost the development of Hibernia South, which would have extended the life of the Hibernia field, and Hebron Ben Nevis, a new heavy-oil development. The projects are on hold following disagreements between some of the same oil companies and the provincial government.

“The mood is pretty negative,” said Paul Barnes, spokesman for the Canadian Association of Petroleum Producers in St. John’s. “It’s a year since Hebron failed to go ahead, and it’s a few months since Hibernia South didn’t get approved. And coupled with that we have a [proposed] energy plan, and a lot of people are concerned about what that may contain.”

The plan is expected to be released this spring and involve higher royalties and greater provincial control over the industry.

Mr. Barnes said exploration plans are being pushed back because of the availability of rigs, not the investment climate in Newfoundland.

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