Risky wells

The news that the provincial government is getting into the business of oil exploration can be met with two distinct viewpoints. In any venture involving risk, there's a balance between a potential payoff and the possibility of wasting resources.

In recent years, the province has benefited greatly from oil royalties stemming from the high price for crude. Surplus budgets and record spending created, for a time, significant optimism regarding Newfoundland and Labrador's position as an economic player in Canada.

Last year, the province's largest project, the Hibernia oil field, produced over 50 million barrels of oil, almost 140,000 a day. Production continues from the Terra Nova and White Rose projects, and this time last year, Premier Danny Williams announced an agreement on the Hebron, a deal 20 years in the making.

That deal created a new role for the provincial government in oil and gas dealings through a 4.9 per cent equity stake, which it paid $110 million. The government said at the time this could be worth anywhere from $20-$28 billion of the field's 20-to-25 year lifespan.

From this deal, brought about through strong-arm tactics used by the province in negotiations with Hebron's other players, Premier Williams has attracted the Danny ChÁvez moniker in reference to Venezuelan president Hugo ChÁvez.

That country has a state-owned oil company PDVSA, and oil is responsible for one-third of the country's gross domestic product, according to the Council on Foreign Relations. President ChÁvez's personality dominates the country, and Premier Williams finds himself in a similar position in this province.

Having an equity stake in a project carries with it greater risks than when relying on royalties, though the overall payoffs can be stronger. In the case of oil exploration, where the existence of oil is an unknown quantity, the risks are considerable.

Nalcor Energy, a company established by the province to manage energy resources, will be the primary operator on three exploration permits on the west coast of the island, with total investment coming in at $20 million.

This will not be the first time exploration has taken place along the west coast, as there are a number of oil companies presently holding exploration permits for that side of the island. According to Ian Lerche, a professor in geological sciences at the University of South Carolina who wrote a book on the risks of oil exploration, only 10 per cent of exploration projects are successful.

It could be $20 million wasted, or it could turn into billions of dollars in the long run. It may be a gamble with scientific basis backing it, but it's a gamble nonetheless.