Shetland Islands Council and Total seal deal for £500 million gas terminal

Shetland Islands Council  finally struck a financial deal with Total late yesterday afternoon allowing the oil company to build its £500 million gas terminal at Sullom Voe in return for rent and other benefits for the community.

Council convener Sandy Cluness said the lease and the spin-off income from the development could be worth £200m to the Shetland economy over the years.

However, a week of delays and a premature announcement of the go-ahead for the £2.5 billion Laggan-Tormore project by Total’s French office mean it is unlikely that there will now be any high-profile official signing ceremony in Shetland involving a government minister and company executives.

The other owner of part of the site, farmer Bryden Nicolson, has also reached a deal to lease his land at Garth, which makes up about one-third of the 110-acre site and access road wanted by Total. He said the paperwork was ready at his solicitor Neil Risk’s office in Lerwick and he might sign it yesterday afternoon.

Now that the council and Total have clinched their deal a minister at the UK’s department of energy and climate change will still have to sign off the gas field development sometime next week. But the planned media event and even a pronouncement by Prime Minister Gordon Brown appear to have been canned despite the development being viewed as of major national strategic importance in opening up west of Shetland gas reserves to meet Britain’s future energy needs.

Total is keen to get to work and expects to start building a new access road and shifting earth from as early as the middle of next month with first gas production expected in 2014. Between now and then up to 1,000 workers will be required to create the plant. The council granted planning permission last month.

No details of the council’s lease package had been released as we went to press and nothing has been officially disclosed about the recent negotiating process. It is understood some of the delay this week was over a charge sought by the council based on the amount of gas passing through the new terminal, linked to its trade price, which would earn the community more when Total’s profits are up.

Mr Cluness expressed his delight this morning that a deal had been reached. He said: “This is a significant decision for Shetland and I am confident that the agreement represents the best possible outcome for Shetland.

“Securing the gas plant on land means that Shetland as a whole, and the North Mainland in particular, will benefit from new jobs.  Shetland is starting to see signs of the recession, and this new facility will bring welcome jobs in the construction sector, as well as in the operation of the plant and ancillary services.

“I also hope it can be the start of breathing new life into the future of Sullom Voe Terminal and secure Shetland’s position as a key player in the energy industry for years to come.  The facility provides a new source of jobs and opportunities for our young people, to give them confidence to make Shetland their home.”

Mr Cluness said the negotiation process had been intense and prolonged over a period of time, but that was nothing less than expected.

He said: “I would wish to convey my thanks to the council’s negotiating team, who worked hard to secure the best possible outcome, taking account of all the risks and benefits associated with this project.

“I welcome the opportunity to work with TOTAL E&P UK Limited to develop this exciting project, which I hope represents the opening of a highway into the next stage of North Sea exploration and production.”

Mr Cluness added that the terms of the agreement contained commercially sensitive information and therefore the council could not make that public at this stage.

Although the gas terminal will initially handle production from Laggan-Tormore, ultimately it is expected to process a far larger volume of gas as other promising west of Shetland gas fields come on stream.

The deal may also include some commitment to set up a community fund to provide grants for any local groups based in the area affected by the upheaval.

It is understood that the council will now seek to sell the site to Shetland Charitable Trust to avoid being penalised by the government for earning income as a landowner. The rent paid by Total would be handed over by the council to the charitable trust to boost community funds.

The Full Council met three times this week as a final deal proved elusive. It was supposed to have been wrapped up at the end of last week and sanctioned on Tuesday by councillors before the grand signing ceremony in Lerwick yesterday with Total and UK energy minister Lord Hunt.

But on Tuesday councillors spent three hours behind closed doors with their advisers, including a team of lawyers, before deciding to continue working with Total for a better deal. Mr  Cluness said they were striving for “the best outcome that can reasonably be achieved for the Shetland community.”

Talks continued on Wednesday and new submissions from Total were still arriving late on Wednesday evening and early yesterday. Mr Cluness had hoped a deal would be clinched yesterday morning but the new information meant he again had to adjourn the Full Council when it gathered at 9am and rush off with his team for further negotiations.

Confusion reigned on Wednesday when Total’s Paris headquarters unexpectedly announced the go-ahead of Laggan-Tormore before all the pieces were in place. The company had sanctioned the project but failed to properly liaise with its UK offshoot in Aberdeen.

The twin fields of Laggan-Tormore have reserves the equivalent of around 230 million barrels of oil and at peak production the daily flow will be equivalent to 93,000 barrels of oil.

Total said its groundbreaking project was key to unlocking further oil and gas reserves west of Shetland, prompting an increase in exploration and development activity in the area for Total and the rest of the oil industry.

Exploration and production president Yves-Louis Darricarrère said: “In taking the decision to develop this complex project, Total confirms its commitment in pursuing its investments in the North Sea and its long-term objective towards helping to secure energy supplies for the United Kingdom.”

The company revealed that it has bought out the interests of Chevron and ENI UK to give it an 80 per cent stake in Laggan-Tormore. Its other partner is DONG.

Speaking about his part in the high-level wheeling and dealing to let Total into Sullom Voe, Mr Nicolson said he had secured “a comfortable deal” although he was “always looking for more”. He did not disclose what he will earn from his agreement but rubbished rumours that he was selling up for anything between £3 million and £10 million, adding that nothing was being sold, only leased.

Without Mr Nicolson’s agreement the gas plant could not have gone on the chosen site because there is no other access point. The operators of the existing oil terminal are understood to have been against Total and up to 1,000 workers gaining access via the roads in its terminal due to security and safety concerns.

In theory the whole gas terminal might have been built on Mr Nicolson’s land if Total and the council failed to reach a deal and the oil company went back to the drawing board for a fresh planning application.

It has emerged that a plan by Total to have a workers’ camp on council land at Sella Ness to house the incoming construction workforce was scrapped because of budget cutbacks of around £300,000 for the Shetland part of the overall project.

The camp would have been built by Shetland Charitable Trust’s property company Slap. Instead, Total has decided it will not need special worker accommodation until the second and third years of the construction phase and it has yet to specify whether that will be in the form of a ship, accommodation platform or huts on land.