Exxon Mobil primed to get royalty refund worth additional $100M

A Nova Scotia government royalty refund owed to Exxon Mobil and its partners in the Sable Offshore Energy Project jumped by nearly $100 million late last year when the oil company unexpectedly increased the estimated cost of abandoning the project, the province's energy minister says.

The abandonment costs will have major implications for the Nova Scotia government, since a portion of the cost will be deducted from previous years' royalties after Sable ceases production.

That means Exxon and its partners are in for a royalty refund.

"The Department of Finance was setting aside moneys through the royalty regime knowing there was going to be a cost at the end of the day," says Michel Samson, the province's energy minister.

No end date for Sable

"What you had in the fall with the fiscal update was our partners tell us it's going to be much more than what we initially anticipated."

• Exxon Mobil to receive millions for Sable gas decommissioning
• Exxon Mobil prepares to decommission Sable gas field

Exxon Mobil has said decommissioning could begin as early as 2017, but has not set an end date for Sable.

Canada's first offshore natural gas project has been pumping natural gas from six fields underneath the ocean floor near Sable Island since 1999. The project has generated $1.9 billion in royalties but production levels have fallen in recent years.

Nova Scotia revealed it had received higher abandonment estimates in December from the Sable operators. The revised estimate increased the amount of royalty refund owed to Exxon Mobil and its partners by $98 million.

The estimate was booked as an expense in 2015-16 and was a major hit on the province's bottom line, contributing to the increased deficit forecast by the McNeil government.

$42M set aside for abandonment of gas plant

The province will not release the total royalty refund obligation to the Sable operators, claiming it and the abandonment estimates are commercially privileged information restricted by confidentiality provisions in its 1997 royalty agreement with the operators.

CBC News has learned a partial and only abandonment cost estimate was recently released by Exxon-Mobil under orders from federal regulators.

On Jan. 29, Exxon Mobil disclosed for the first time that $42 million had been set aside to cover the abandonment of the Goldboro gas plant, where natural gas makes landfall in Nova Scotia.

In 2015, the National Energy Board ordered oil and gas companies to disclose the amount set aside and proof of credit for abandonment work at facilities under the board's jurisdiction. The deadline was Jan. 31, 2016.

Exxon's estimate of $42 million was based on 2010 dollars.

Regulators keep offshore facility costs secret

The cost of shutting down and removing Sable's offshore facilities is expected to be much more expensive than the gas plant in Guysborough County, according to background interviews with government officials.

The marine facilities include offshore platforms, field tie-in lines and 200 kilometres of undersea pipelines. Those estimates have not been disclosed. They fall under the jurisdiction of the Canada-Nova Scotia Offshore Petroleum Board, which says it is not allowed to release the information.

"We are under different legislation than the NEB and cannot release that information as it is considered privileged,"Kathleen Funke, a spokeswoman with the Canada-Nova Scotia Offshore Petroleum Board, wrote in an email to CBC News.

Exxon Mobil has not yet filed its abandonment plan for the Sable project with the CNSOPB.

How the royalty regime works

The royalty agreement provides that abandonment costs incurred within three years of production ceasing can be carried back as a deduction from prior years' royalties.

The province is guaranteed a minimum five per cent of gross revenues. While the so-called Sable Interest Holders are in for a refund, Nova Scotia says the oil companies areon the hook for the "vast majority" of the abandonment cost, making it in the companies'best interests to keep costs as low as possible.

Samson defends the arrangement.

"People need to keep in mind these agreements were reached in the 1990s," Samson said.

"This is typical of these type of agreements, that the province or the jurisdiction receiving the revenues also bears some responsibility when it comes to the decommissioning of these projects."

Royalties will 'far outweigh' decommissioning costs

Samson says the $1.9 billion in royalties earned will far outstrip any refund.

"At the end of the day, we need to look at what royalties have brought to us over the years, which will far outweigh any costs to the province for decommissioning," he said.

Samson hopes other operators take over the Sable assets. Last June, Exxon said its offered "commercial access" to the Sable infrastructure with no takers.

"To date those efforts have not been successful," Dylan Pugh, manager of Sable, told a meeting of the Maritimes Energy Association in Halifax.

What the Sable players are paying

In its disclosure report to the National Energy Board on the abandonment of the gas plant, Exxon provided a breakdown of the partners' commitments to cover costs:

• Exxon has a 50.8 per cent stake in the Sable project and a $21.2 million letter of credit from the Royal Bank of Canada.
• Shell Canada Energy, with a 31 per cent stake, has a $13 million letter of credit from TD Bank.
• Imperial Oil Resources, with nine per cent of the project, has a $3.7 million letter of credit from RBC.
• Pengrowth Energy, with 8.4 per cent ownership, has a $3.5 million letter of credit from RBC.
• Mosbacher Operating Ltd., with a 0.5 per cent stake, has a $210,540 letter of credit with CIBC.