REALITY CHECK on Nalcor assumptions on future oil prices and MF project costs This is how MHI handled oil prices in its report to the PUB in January 2012 in calculating Least Cost at Muskrat Falls. pub.nf.ca/applications/MuskratFalls2011/files/mhi/MHI-Report-VolumeI-Cumulative.pdf +++++++++++++++++++++++++++++++++++++++++++++++++ At that time MHI worked for the PUB – then Nalcor hired MHI to do a further economic review in October 2012. But Nalcor confined MHI’s October analysis to the cost side only ( working on numbers provided by Nalcor). See powerinourhands.ca/pdf/MHI.pdf ++++++++++++++++++++++++++++++++++++++++++++++++++ So the MHI January 2012 study is, amazingly, the latest we have on the impact of oil prices on MF. Under section 7.9 CPW Analysis Key Findings we find the following: Fuel Price There remains significant uncertainty in fuel price forecasts. Global disruptions in supply could drive the price of oil well above inflation. However, new sources of supply, such as shale oil or downward trends in natural gas pricing, may have the potential to minimize fuel price increases. If fuel prices drop by 44% below those used by Nalcor, the difference between the two cumulative present worth results becomes neutral. However, if fuel prices rise more than the reference price used in the cumulative present worth analysis, an even greater difference between the cumulative present worth results would occur. The risks associated with these inputs are further magnified considering the 50+ year period (2010 – 2067) used in the preparation of the cumulative present worth analysis. ++++++++++++++++++++++++++++++++++++++++++++++ Very interesting. Even Putin in the Crimea/eastern Ukraine and ISIS in Iraq have not prevented falling prices. The shale impact has obviously more than offset the fear of global supply disruptions. In any event, using MHI’s criteria , a drop of 44% from $135 per barrel equals a drop of $59.40 per barrel and a price of $75.60 per barrel . So according to MHI, $75.60 is the price per barrel at which the whole so-called Muskrat Advantage is gone based on oil prices alone. BUT in section 7.4, MHI also pointed out that if MF costs rose by 50% the assumed benefit of Muskrat was also essentially gone as well (reduced to less than $200 million). In January 2012, MHI was required to work on the basis of a budget of $6 billion (as provided by Nalcor); Nalcor’s current budget of $8 billion means an increase of $2 billion or 33%. According to MHI this would lead to a loss of 66% of the MF “advantage” ( 33%/50%). On the oil price side , even a price of $100 per barrel ( which is really far too high) would be $35 lower than Nalcor’s$135 per barrel assumption and represent s a loss of approximately 60 % of the so-called Muskrat Advantage ($35/$59.40) . So loss of (at least ) 66% of Advantage for cost overruns combined with (at least) 60% of Advantage for lower oil price means that - even based on Nalcor’s own wildly optimistic numbers, MF is 126% more expensive than so called isolated island option. And Nalcor has known this for a long time . More realistic cost and oil price numbers would only make it worst – much worst. Amazingly Nalcor’s fall 2012 terms of reference prevented MHI from analysing the combined impact of higher costs and lower oil prices – by far the most likely scenario even in 2012. Think of the combination of $70 to $90 per barrel oil and a $10 billion cost ( 25% increase from Nalcor’s spring 2014 cost numbers). Conclusion We desperately need an independent specialist to redo the sort of sensitivity analyses in sections 7.4, 7.6 and 7.7 in the MHI Jan 2012 report at the PUB link above - using up to date oil price projections and project costs. 7.4, 7.6 and 7.7 are conveniently short and concise. The combination of higher project costs and significantly lower oil prices would surely knock Muskrat out of contention as “Least Cost” option.
Posted on: Mon, 15 Sep 2014 23:27:04 +0000
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