Law of the Sea crashes on the Rock

Last week, the government of Newfoundland and Labrador and Equinor Canada announced a framework agreement for the potential development of the $6.8-billion Bay du Nord deep-water offshore oil project. It is welcome news, coming as it does amid reports of a nearly $40-billion decline in capital investment in Canadian oil and gas projects over the past three years.

If the project proceeds, it will trigger Canada’s obligation under Article 82 of the United Nations Convention on the Law of the Sea (UNCLOS) to make payments to as-yet-unidentified members of the international community. Such payments would be based on production from the project, commencing after the fifth year of production and rising to seven per cent by the 12th year. Article 82 of UNCLOS has never before been triggered anywhere in the world.

It appears that last week’s agreement is silent on Article 82. The agreement therefore raises the question: Who will pay? Canada, Newfoundland, or industry? (Or possibly some combination of them). Yet another serious federalprovincial dispute and public controversy over the development of oil and gas resources appear inevitable.

The Bay du Nord project site lies approximately 270 nautical miles (500 kilometres)

offshore. Canada’s rights to explore and develop seabed resources in the area are not in dispute; UNCLOS confirms continental-shelf rights beyond 200 nautical miles, independently of Canada’s 200-nautical-mile exclusive economic zone. Indeed, Canada’s continental rights, as affirmed by UNCLOS, in some areas extend more than 350 nautical miles offshore.

Under Article 82 of UNCLOS, however, Canada is obliged to make the prescribed payment to the international community on all production beyond 200 nautical miles.

It is clear that, so far as UNCLOS is concerned, the obligation is that of Canada, that is to say, the federal government.

However, UNCLOS is, quite properly, silent on how Canada might go about satisfying its obligation. To date, Canada has taken no public steps to address the question.

Some assume that industry must bear the cost of Canada’s obligation, based on the view that Article 82 was the price paid by Canada (and other nations with wide continental shelves) to acquire rights beyond 200 nautical miles. Industry is the beneficiary of Canada having acquired those rights under UNCLOS and, so the argument goes, therefore should pay the price.

The view is contradicted by the historical record. Canada had been exercising petroleum

exploration rights over areas well beyond 200 nautical miles as far back as the 1960s, based on the 1958 Geneva Convention on the Continental Shelf. The notion that Canada would pay to acquire rights that it consistently maintained it already possessed does not hold water.

The better view is that Canada agreed to Article 82 as but one component of UNCLOS as a whole package, from which Canada derived other valuable benefits, going well beyond confirmation of its rights over resource development on the continental shelf. In this view, Canada at large is the beneficiary of UNCLOS and should bear all of the associated burdens, including the cost of complying with Article 82.

The view that industry should pay also ignores economic reality. The further from shore, the greater the cost of development and production. Imposing additional fiscal burdens on developments beyond 200 nautical miles would make the economics all the more precarious.

Interestingly, Norway and the U.S. (the only two jurisdictions that have established frameworks for the future possibility of being required to make Article 82 payments) have recognized this reality. While their regimes require that industry must make royalty payments reflecting the respective government’s

Article 82 obligation, such royalty payments are offset against industry’s other payment or taxation obligations.

The question of who will pay is complicated in no small degree by the Atlantic Accord between Canada and Newfoundland. Under the accord, the province has the right to set the fiscal terms for developments in the adjacent offshore and is entitled to 100 per cent of offshore resource revenues “as if these resources were located on land.”

The province may well take the position that the Article 82 obligation is Canada’s and Canada’s alone. No doubt the province recognizes that every dollar of the economic rent from a project that was diverted to the international community would potentially be a dollar out of the province’s coffers.

There are other technical questions arising from the implementation of Article 82 apart from the question of who should pay, some with practical implications for industry.

In February, the premier of Newfoundland wrote to the prime minister requesting a renegotiation of the Atlantic Accord. Article 82 will almost certainly be a central, and no doubt controversial, topic at the negotiating table.