Ottawa, N.L. disagree on who will foot hefty Bay du Nord royalty bill

Canada could soon be the first country on Earth to pay millions of dollarsin international oil royalties asaconsequence of the Bay du Nordmegaprojectin Newfoundland and Labrador's offshore but just how that bill gets paidremains to be seen.

Article 82 of the United Nations Convention on theLaw of the Seaallows countries like Canada known as "broad margin" states that havelarger-than-normal continental shelves to extract offshore oil beyondtheir200-nautical-mile limit.

But that extractioncomes with a catch: broad margin states mustpay royalties on that oil, money whichthen gets redistributed todeveloping countries.

Bay du Nord, spearheaded by Norwegian oil giant Equinor, is the first project to move the province's offshore oil industry past Canada's nautical limit and into the deep waters of the Flemish Pass, which sits 270 nautical miles about 500 kilometreseast of St. John's.

AlthoughBay du Nordmovedcloser tocommissioning this month with a green lightfrom the federal environment minister on April 6 Ottawa and the Newfoundland and Labrador government still haven't agreed on just howthe hefty royalty billresulting from the United Nations convention will be paid.

Hundreds of millions of dollars at stake

Michael Gardner, a Halifax-based consultant who previously studied the issue for Natural Resources Canada, said Wednesday that UNCLOS royalties from the projectcould reach hundreds of millions of dollars.

"It all comes back down to, what are the production levels that you reach and what's the price of oil?" Gardner said.

Sowhere will thatmoney come from?

The federal government negotiated UNCLOS in the 1970s, andParliament ratified the document in 2003.Ottawa says the provincialgovernment should help pay the royalties, but the province, which expects to receive $3.5 billionfrom Bay du Nord, rejects that suggestion outright and has for years.

"The federal government is the signatory to UNCLOS, and would be responsible for making payments under Article 82," said Andrew Parsons, Newfoundland and Labrador'senergy minister, in a statement last week.

"The province does not see a role for itself in this agreement."

The Newfoundland and Labrador government receives all of its offshore revenues through a deal with Ottawa known as the Atlantic Accord.

Couldn't Equinor pay the difference?

Ottawa could impose an additional levy on Equinor to help meet its international obligations.

But that approach carries risks, warned Gardner.

"At some point, if the operator is squeezed sufficiently, it no longer is an economic proposition," he said.

"It's that old Norwegian expression: you don't want to kill the cow you're trying to milk."

In a statement, Equinor spokesperson Alex Collins said, "Decision-making regarding the implementation of UNCLOS royalties rests with the government of Canada."

Collins declined to answer further questions.

"The implementation of this mechanism in Canada, including the input from the various parties, is still under development," said Miriam Galipeau, aspokesperson for Natural Resources Canada.

N.L. position called 'almost petty'

Armand de Mestrahl, a member of the Canadian team that negotiated UNCLOS in the 1970s, said he believes a compromise between the provincial and federal government is inevitable.

"Don't forget that without that international agreement, which was painstakingly negotiated over several years by the federal government, there would be no formula. There would be no rights. We had to fight so that the international community would respect Canada's right," de Mestrahl said in an interview in French with Radio-Canada.

"People in Newfoundland say, 'They stole our rights away.' It's easy to say that, but it's almost petty because the federal government and the Canadian delegation put in incredible effort to ensure that the continental shelf would be recognized."

He added, however, thatOttawa would be remiss to overlook the provincial government's current considerable debt load and series of structural deficits.

"It's hard to see how the government won't concede anything," de Mestrahl said.

Still time to negotiate

Ottawa and the provincial government still have years to come to an agreement.

Production at Bay du Nord isn't expected to begin until at least 2028, and under UNCLOS, no international royalties are due during the first fiveyears of production, in a measure meant to help operators recoup upfront capital costs.

Annual royalty payments of one per cent of gross production revenues begin after the sixth year of production, and increase by one percentage point per year until the 12th year. Thereafter, royalty payments remain at seven per cent, according to the Canada Energy Regulator's website.

Bay du Nord is expected to produce at least 300 million barrels of oil over 30 years.

Risk of prolonged litigation

In a 2020 article, Dalhousie University law professor Aldo Chircop warned, "There could be the realistic prospect of prolonged federal-provincial litigation" over who pays the UNCLOS royalties."

But in an interview last week, he said, "We live in the era of co-operative federalism. So basically what that means is that the federal and provincial governments will work together on this to find a way.

"Newfoundland would recognize that the reason why there is this offshore development out there is because of the Law of the Sea convention, which creates an obligation for them. And therefore, they would have to work with the federal government to honour this international obligation."

In an email regarding UNCLOSfromOctober and obtained through access-to-information legislation, an employee at Newfoundland and Labrador's energy ministry wrote, "Discussions between the federal and provincial governments, and industry are ongoing as to how to meet this obligation."

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