The Province of Newfoundland and Labrador introduced a new generic offshore oil royalty regime on November 2, 2015. The new royalty regime is intended to apply to all projects going forward, including those to whom exploration and significant discovery licenses have already been issued.
High-level details of the new royalty regime can be found here [PDF]. Generally speaking, under the new royalty regime rates will increase as a project becomes more profitable with the highest rate (50%) being payable by projects that have returned $3 for every $1 spent.
The new regime is subject to the development of regulations under the Petroleum and Natural Gas Act (the Act), which the Province expects will be completed in early 2016.
In his press conference, Hon. Derrick Dalley, Minister of Natural Resources, heralded the new regime as providing fiscal certainty with competitive rates for Newfoundland and Labrador’s offshore industry.
While such certainty is undoubtedly appealing, we are highly skeptical that this new regime will provide that certainty. Most of the projects offshore Newfoundland and Labrador are subject to fiscal agreements between the project proponents and the Province. Many of these fiscal agreements have been entered into by the Province pursuant to section 33 of the Act, which permits the Province and project proponents to enter into royalty agreements that are inconsistent with and prevail over any royalty regulations promulgated under the Act (such as the regulations to implement this new royalty regime). The Province has not given any indication that it intends to amend or repeal section 33 of the Act. As a result, the Province and project proponents will still be able to enter into project specific royalty agreements that supersede this new royalty regime, and given the massive costs associated with such projects and the impact that the royalty regime has on the economic viability of any project, we expect this practice to continue.
In addition, recent discoveries in the Newfoundland and Labrador offshore area may be subject to another royalty payable pursuant to the United Nations Convention on the Law of the Seas (UNCLOS). Projects that lie beyond Canada’s 200 nautical mile exclusive economic zone that extract resources from beneath Canada’s continental shelf may be subject to a royalty of up to 7%, payable to the International Seabed Authority. Article 82 of UNCLOS sets forth this requirement and it remains to be seen how and by whom this royalty will be paid.
The potential for a new government (with a provincial election expected to be called for November 30, 2015), practices of past governments and the unsettled issue of the UNCLOS royalty payment suggest that the new royalty regime is anything but certain.