INTRODUCTION

In late July, 2018 Equinor Canada Ltd. (formerly Statoil Canada Ltd.) and the Premier of Newfoundland and Labrador announced a framework agreement for the potential development of the Bay du Nord oil discovery located approximately 270 nautical miles (500 kilometres) offshore.¹ Coming in the face of the impasse confronting proposed federally-regulated pipelines, and amidst widespread concern about the flight of capital from the Canadian oil and gas sector,² the announcement was greeted as a rare piece of good news for Canada’s resources industries. It was heralded by the Premier as the first step into a new frontier, as well as a new era of deep-water exploration in a new basin, the Flemish Pass: “The future of our offshore begins today.”³

The Bay du Nord discovery, together with the nearby Baccalieu discovery that would be included in the project, is estimated to have recoverable reserves of approximately 300 million barrels.⁴ Production rates are estimated to range from 90,000 to 188,000 barrels per day over 20 years, with first oil in 2025. Pre-development and development expenditures are estimated at $6.8 billion. A final investment decision (project sanction) by Equinor and its project partner Husky Oil Operations Limited is expected in 2020. The province would hold a 10 per cent equity interest in the project.

Apart from its importance for the future of the Newfoundland and Labrador offshore oil industry, the project would also be significant in legal terms; it would likely be the first oil and gas development to be undertaken anywhere in the world beyond 200 nautical miles from shore.

As such, production from the Bay du Nord oil field would trigger Canada’s obligation under Article 82 of the United Nations Convention on the Law of the Sea (UNCLOS)⁵ to make payments to the international community based on production. While the overall legal framework for exploring for and developing seabed resources on Canada’s continental shelf beyond 200 nautical miles is well-established, Canada has yet to make any provision for meeting this particular obligation.

In developing its approach to the issue, Canada will be confronted by two challenging questions:

1. Who, as between government and industry, should ultimately bear the financial cost of meeting Canada’s Article 82 obligation?
2. Having regard to the provisions of the Atlantic Accord⁶, under which Newfoundland and Labrador is entitled to “100 per cent of offshore resource revenues as if these resources were on land…”, how would the fiscal burden be borne as between the federal and provincial governments?

UNCLOS – CONTINENTAL SHELF RIGHTS

Under Article 77 of UNCLOS, coastal states exercise “sovereign rights for the purpose of exploring and exploiting” the natural resources of the adjacent continental shelf. Article 76 defines the continental shelf as comprising the sea-bed and subsoil in areas beyond the territorial sea “throughout the natural prolongation of [a coastal state’s] land territory to the outer edge of the continental margin” to a minimum distance of 200 nautical miles. Where the continental margin in fact extends beyond 200 nautical miles, the outer edge is to be determined in accordance with a complex formula combining the thickness of sediments and distances out to 350 nautical miles – and potentially beyond in the case of certain natural components of the continental margin.⁷ Areas of the continental shelf beyond 200 nautical miles are referred to as the extended continental shelf, or ‘ECS’.

Continental shelf rights are independent of the exclusive economic zone (EEZ) established under Part V of UNCLOS, frequently referred to as the “200-mile limit.” While the location of the Bay du Nord discovery lies beyond the outer limit of Canada’s EEZ, it is clearly within the outer limits of Canada’s continental shelf rights under UNCLOS. Canada’s claims in this regard are not disputed.

Canada has incorporated these rights into domestic law, particularly under the Oceans Act⁸ and various Acts that apply to the disposition of offshore petroleum rights and the conduct of operations in exercise of those rights.⁹

ARTICLE 82

Article 82 of UNCLOS requires the coastal state to make payments or contributions in kind in respect of the production of non-living resources beyond 200 nautical miles. Such payments must be made annually, commencing at 1 per cent in the 6th year of production and increasing by 1 per cent per year until the 12th year. Thereafter, the payments or contributions remain at 7 per cent. Payments or contributions are to be made through¹⁰ the International Seabed Authority to states parties to UNCLOS “on the basis of equitable sharing criteria…”¹¹

To date, Canada has not adopted any mechanism to actualize its obligation under Article 82. However, for some years, the Canada-Newfoundland and Labrador Offshore Petroleum Board (CNLOPB) has issued notices for parcels that include areas beyond 200 nautical miles that the holders of production licences may be required “to make payments or contributions in order for Canada to satisfy obligations under Article 82” of UNCLOS.¹² These notices state that such a requirement may be imposed “through legislation, regulation, licence terms and conditions, or otherwise…” The notices provide no further details.

WHO SHOULD PAY?

The international obligation under Article 82 is imposed directly on Canada (that is to say, the federal government), as the state party to UNCLOS.¹³ However, it is for Canada to decide as a matter of domestic policy how it will meet its obligation – and specifically whether it will bear the financial cost itself or pass it on to industry. As will be discussed further below, it appears that passing the cost on to industry would not be possible within the framework of the Atlantic Accord as it currently exists and would negatively affect Newfoundland and Labrador’s fiscal return from any production beyond 200 nautical miles.

TWO VIEWS OF ARTICLE 82

The Quid Pro Quo View

Article 82 is often argued to have been the result of a quid pro quo settlement of an issue that permeated the negotiation of UNCLOS.¹⁴ According to this view, the payment to the international community that is required by Article 82 was the price paid for coastal states with wide continental margins (including Canada) being granted sovereign rights over the continental shelf beyond 200 nautical miles. Industry, as the primary and direct beneficiary of the exercise of those rights, so the argument goes, should pay that price.

Canada has not publicly subscribed to this view of Article 82. However, several reports in 2014 quoted a spokesman for the Department of Foreign Affairs, Trade and Development as writing in an email that “article 82 payments should be sourced from the benefits stemming from the associated offshore activity.”¹⁵

The Alternative View

This quid pro quo view of Article 82 is not, however, supported by the historical record and is directly contradicted by official positions tabled by Canada throughout the negotiation of UNCLOS. Canada consistently maintained that it had already acquired and exercised sovereign rights to the outer limits of its continental margin long before negotiations for UNCLOS even began in 1973.

Indeed, Canada had begun exercising sovereign rights over areas well beyond 200 nautical miles by granting exploration permits beginning in the 1960s. By 1970, permits had been issued for virtually all prospective areas off the east coast out to a distance of more than 350 nautical miles. Figure 1 is the map, published by the federal Department of Energy, Mines and Resources, of “Federal Oil and Gas Exploratory Permits” for the Gulf of St. Lawrence and Atlantic as at January 1, 1970.

Throughout the UNCLOS negotiations, Canada consistently, and repeatedly, asserted that it already held sovereign rights; Canada made it crystal clear that it was not looking to acquire such rights through UNCLOS. For example, on the eve of the third session of UNCLOS III in Geneva in 1975, the Secretary of State for External Affairs announced:

We are prepared to explore that possibility [of revenue sharing] and we are prepared to support that principle in order to promote an accommodation. The two conditions – and I am underlining this – on the basis of which Canada would be prepared to support such a principle would be: first, that any agreement worked out would in no way derogate from our established sovereign rights out to the edge of the margin; and secondly, that the financial contributions would go primarily to the developing countries, particularly the least-developed among them.¹⁶

Figure 1 shows that, by January 1, 1970, Canada claimed and was actively exercising sovereign rights over wide areas that extended more than 200 nautical miles offshore.

The basis of Canada’s position was outlined in a paper tabled by Canada on the eve of the first session of UNCLOS III in December 1973:

The Canadian position regarding the limits of the continental shelf is based on the 1958 Convention itself, on the 1969 decisions of the International Court of Justice in the North Sea Continental Shelf cases (which defined the continental shelf as the submerged natural prolongation of the continental land mass) and on state practice. On the basis of these three legal foundations Canada claims and exercises rights over the whole of the continental margin comprising not only the physical continental shelf but the continental slope and rise as well.¹⁷

Clearly Canada was not looking to UNCLOS to acquire sovereign rights over the Extended Continental Shelf.¹⁸

This suggests that something more was at stake for Canada in reaching a successful conclusion to the negotiation of UNCLOS. Canada’s other material, and arguably more immediate, interests throughout the period during which UNCLOS was being negotiated (1973 to 1982) included protection of the Canadian onshore nickel mining industry,¹⁹ management of its coastal fisheries, freedom of navigation, Arctic sovereignty and protection of the marine environment. Had UNCLOS not been concluded successfully, Canada’s costs to protect its interests, including defense expenditures,²⁰ would likely have increased; in avoiding such costs, the government of Canada itself was a direct beneficiary of UNCLOS.

From this perspective, Article 82 was but one of the prices paid, not for the acquisition of sovereign rights over the extended continental shelf, but for all of the benefits that flow to Canada from UNCLOS as a package. In this view, the cost of complying with Article 82 should be paid by Canada, on behalf of all beneficiaries.

This alternative view of Article 82 is also supported by the fact that UNCLOS was always regarded as a package deal that could not be teased apart into a series of specific trade-offs. For example, in the Introduction to the first publication of the official text of UNCLOS in 1983, the Special Representative of the Secretary-General of the United Nations for the Law of the Sea wrote:

The concept of the package pervaded all work on the elaboration of the Convention and was not limited to consideration of substance alone. It became the leit-motiv of the Conference and in fact permeates the law of the sea as it exists today.²¹

Canada consistently supported this conceptual view of the Convention, as reflected in numerous statements by Ministers and officials, both over the course of the UNCLOS negotiations and in the wake of the successful conclusion of the Convention.²²

THE ATLANTIC ACCORD

Should Canada nevertheless decide that the cost Article 82 should be passed on to industry as a component of the fiscal terms for oil and gas development on the extended continental shelf, it will be confronted by the terms of the Atlantic Accord, under which Newfoundland and Labrador is granted authority over establishing such fiscal terms and the right to 100 per cent of the revenues therefrom.

The purposes of the 1985 Atlantic Accord include providing “that the Government of Newfoundland and Labrador can establish and collect resource revenues as if these resources were on land, within the province…”²³ Under paragraph 2 of the Atlantic Accord 2005,²⁴ Newfoundland and Labrador “will continue to receive 100 per cent of offshore resource revenues as if these resources were on land…” The federal and provincial legislation implementing the Accord gives statutory effect to these provisions.²⁵

It is clear from these provisions that Canada could not flow the cost of meeting its obligation under Article 82 through to industry without the agreement of Newfoundland and Labrador. Furthermore, the province, not Canada, would have to implement such a proposal, through its fiscal arrangements with industry.

The question that immediately arises is: Why would Newfoundland and Labrador agree? In fact, there is an obvious reason why it would be reluctant to do so.

The gross revenue generated by any offshore oil development is determined by market prices, beyond the control of governments or developers. The portion of that revenue available for sharing between governments and developers (after allowing for the costs of development and a reasonable return on capital) is, therefore, fixed. If the cost of the Article 82 obligation were imposed directly on industry, the result would be a commensurate reduction in the portion of revenue available to be shared with the province. The Article 82 funds would be diverted from funds otherwise available for capture by the province; imposing the cost of the Article 82 obligation on industry would result in Newfoundland and Labrador bearing at least part of that cost.

Any suggestion that this result could be avoided by simply requiring industry to absorb 100 per cent of the Article 82 cost ignores economic reality. The cost of offshore operations is directly affected by distance from shore. If anything, fiscal arrangements for operations beyond 200 nautical miles from shore should be less, rather than more, burdensome than for operations closer to shore than 200 nautical miles.

A further consideration points to why Newfoundland and Labrador might be reluctant to accept any proposal by Ottawa that could result in negative financial implications for the province. UNCLOS was signed by Canada on December 10, 1982 and the likelihood that it would come into force and be ratified by Canada was clear by the time the Atlantic Accord was agreed to in 1985. The Accord is, however, silent with respect to any possibility that the cost of Canada’s Article 82 obligation would be borne, directly or indirectly, by Newfoundland and Labrador. On the contrary, the Accord is explicit that the province “can establish and collect resource revenues as if these resources were on land, within the province…” Canada had the opportunity in 1985 to address the question of who would bear the ultimate cost of the Article 82 obligation and did not do so.

The province has a strong argument that any proposed pass-through by the federal government of the cost of Article 82 would be barred by the Atlantic Accord.

REVIEW OF THE ATLANTIC ACCORD

The Atlantic Accord 2005 provides that the agreement is to be reviewed no later than March 31, 2019.²⁶ On February 13, 2018, Premier Dwight Ball told the annual meeting of the Newfoundland and Labrador Oil and Gas Industries Association that the province had written to the Prime Minister initiating the review process with a view to improving the benefits to the province from offshore activities.

Premier Ball was reported to have said that the review was being sought to try to extract more money for the province.²⁷ It is unlikely, therefore, that the province would be amenable to any proposal that it should assume, directly or indirectly, any part of the cost of complying with Article 82.

The Premier and the Prime Minister met subsequently but the only public information that followed from that meeting was a statement attributed to the Premier that the Accord “was being given the necessary attention at the highest levels in both the provincial and federal governments.”²⁸

INTERNATIONAL PRECEDENTS

Two jurisdictions²⁹ with extensive offshore oil and gas activities have established frameworks for the potential application of Article 82. Both pass the cost of the Article 82 obligation through to operators. However, each recognizes that the financial burden must ultimately be borne out of revenues that would otherwise accrue directly to government.

Norway

In the most recent licensing round in Norway for areas in the Barents Sea, announced on June 22, 2017, a notice stated that a licensee “may be required” to cover the expense of Norway’s obligation under Article 82. The notice also stated that “the cost can be deducted under the petroleum taxation.”³⁰ The paragraph does not provide that the cost of complying with Article 82 will be passed on, but merely that “the licensee may be required to cover this expense.”

U.S.

The U.S. is not a party to UNCLOS.³¹ The possibility of future accession to the Convention has nevertheless been acknowledged in recent lease sales that include areas beyond 200 nautical miles in the Gulf of Mexico.

Most recently, in February 2018, the Secretary of the Interior announced proposed Lease Sale 250, scheduled for August 16, 2018, for areas in the Gulf of Mexico.³² Lease Stipulation No. 6 in the Proposed Notice of Sale prescribes provisions that would apply if the U.S. becomes a party to UNCLOS “prior to or during the life of a lease issued by the United States on a block or portion of a block located beyond its EEZ as defined in UNCLOS…”³³ These provisions require the lessee to pay to the U.S. government an amount that corresponds to the value of the payments required by Article 82.³⁴ It is then provided that the lessee “will receive royalty credit [against royalties otherwise payable] in the amount of the UNCLOS-related royalty payment…”³⁵

Common Feature

Both the Norway and U.S. regimes provide that the respective lessees or licensees will receive credit for the amount of any Article 82 related payments, as a deduction in the calculation of petroleum taxation in the case of Norway and towards royalties otherwise payable in the U.S. In both cases, the clear intention is that any Article 82 related payment will not result in an additional cost to industry, except where that payment would be greater than any amount otherwise payable under the lease or licence. This feature recognizes that, ultimately, any Article 82 related payment must be treated as a component of government take and not as an incremental cost to industry.

CONCLUSION

The framework agreement for the development of the Bay du Nord project announced on July 26, 2018 appears to be silent on the question of who will bear the cost of implementing Article 82. This could suggest Newfoundland and Labrador will take the position that the issue is not one to be resolved between the province and the project developers, leaving Canada alone to absorb that cost.

If so, yet another federal-provincial stand-off over resource development would seem to be inevitable.

* Energy Regulation Consultant, Calgary; Co-Managing Editor, Energy Regulation Quarterly. This article draws on research previously published as Harrison, “Article 82 of UNCLOS: The day of reckoning approaches”, (2017) 10 Journal of World Energy Law and Business 488.

1. Executive Council, Natural Resources, News Release, “Premier Ball Marks First Step into New Frontier for Oil and Gas Industry” (26 July 2018), online: <http://www.releases.gov.nl.ca/releases/2018/exec/0726n01.aspx>.
2. See, for example, Canadian Association of Petroleum Producers, News Release, “CAPP Report: Canada falling behind” (26 February 2018), online: <https://context.capp.ca/articles/2018/feature_capp-economic-report>.
3.  News release, supra note 1.
4.  A detailed project description is found in the Project Description Summary filed by Equinor Canada Ltd. with the Canadian Environmental Assessment Agency, June 2018, online: <https://www.ceaa.gc.ca/050/documents/p80154/123011E.pdf>; See also Newfoundland and Labrador, Department of Natural Resources, Bay du Nord Framework Agreement: Technical Briefing, (Newfoundland and Labrador: Department of Natural Resources, July 2018), online: <https://www.nr.gov.nl.ca/nr/energy/petroleum/offshore/projects/Final%20BdN%20Framework%20Agreement%20Technical%20Briefing%20July%202018.pdf>.
5.  Convention on the Law of the Sea, 10 December 1982, 1833 UNTS 397 (entered into force as the “United Nations Convention on the Law of the Sea” on 1 November 1994), online: <http://www.un.org/depts/los/convention_agreements/texts/unclos/unclos_e.pdf>.
6.  Memorandum of the Agreement between the Government of Canada and the Government of Newfoundland and Labrador on Offshore Oil and Gas Resource Management and Revenue Sharing (“Atlantic Accord”) (11 February 1985), online: <https://www.servicenl.gov.nl.ca/printer/publications/aa_mou.pdf>; See also Arrangement between the Government of Canada and the Government of Newfoundland and Labrador on Offshore Revenues (“Atlantic Accord 2005”) (14 February 2005), online: <https://www.gov.nl.ca/atlanticaccord/agreement.htm>.
7.  Paragraph 6 of Article 76 of UNCLOS establishes a general outer limit of the continental shelf of 350 nautical miles, but then provides that this limit does not apply “to natural submarine elevations that are natural components of the continental margin, such as plateaux, rises, caps, banks and spurs.” Canada relies on this proviso to extend its continental shelf claim to include the Flemish Cap, which extends in places well beyond 350 nautical miles.
8.  Oceans Act, SC 1996, c 31.
9.  See also Canada Petroleum Resources Act, RSC 1985, c 36 (2^nd Supp); Canada Oil and Gas Operations Act, RSC 1985, c O-7.
10.  The word ‘to’ was used in early drafts of Article 82 and was intentionally changed to ‘through’. See “Issues Associated with the Implementation of Article 82 of the United Nations Convention on the Law of the Sea”, ISA Technical Study No. 4, International Seabed Authority, Kingston, Jamaica, 2009, at p 20, online, <https://www.isa.org.jm/sites/default/files/files/documents/tstudy4.pdf>; See also the discussion in “Implementation of Article 82 of the United Nations Convention on the Law of the Sea”, ISA Technical Study No. 12, International Seabed Authority, Kingston, Jamaica, 2012, at p 27, online: <http://www.isa.org.jm//files/documents/EN/Pubs/TS12-web.pdf>.
11.  The main role of the International Seabed Authority under UNCLOS is with respect to the exploitation of seabed resources in the area beyond the limits of national jurisdiction, that is to say, the area beyond the outer limit of the continental shelf. See in particular UNCLOS, supra note 5, PART XI, Section 4.The Authority’s only responsibility with respect to Article 82 is to identify the recipients of payments or contributions that are made under Article 82 and to serve as the vehicle through which such payments or contributions are made. To date, no recipients of payments or contributions made under Article 82 have been identified.
12.  Most recently in Call for Nominations No. NL18-CFN03 issued in August, 2018, online: <https://www.cnlopb.ca/wp-content/uploads/landissuance/cfn03legal.pdf>, at para 6. The practice of publishing such a notice appears to have begun with Call for Bids NL13-01 in May 2013.
13.  The fact that the obligation under Article 82 rests with the federal government is acknowledged in the notices issued by the CNLOPB, supra note 12, which state that payments or contributions may be required “in order for Canada to satisfy obligations under Article 82…”
14.  See, for example, Aldo Chircop, “Equity on the extended continental shelf? How an obscure provision in UNCLOS provides new challenges for the ocean governance”, Sustainable Oceans: Reconciling Economic Use and Protection, Dräger Foundation, 2013.
15.  Daily Oil Bulletin, 12 August 2014.
16.  Statement by the Secretary of State for External Affairs, at a Press Conference in Geneva, May 1975 (emphasis added).
17.  The position paper was published as Appendix H to the proceedings of the Standing Parliamentary Committee on External Affairs and National Defense, 6 November 1973.
18.  From Canada’s perspective, UNCLOS might, at most, affirm Canada’s established rights.
19.  At the time, Canada was the largest nickel producer/exporter in the world and the potential for deep seabed mining raised the specter of significant market disruptions. The Canadian nickel industry was also interested in itself participating in seabed mining exploration and development ventures. See further, Ontario, The Future of Nickel and the Law of the Sea, Mineral Policy Background Paper No 10, (Toronto: Ontario Ministry of Natural Resources, February 1980); See also Barry G. Buzan and Barbara Johnson, Canada at the Third Law of the Sea Conference: Policy, Role, and Prospects, Occasional Paper Series no 29 (Kingston: Law of the Sea Institute, University of Rhode Island, December 1975). Exploration and development activities for seabed minerals in areas beyond national jurisdiction has not in fact materialized as expected during UNCLOS III.
20.  In a 1979 interview for CBC Radio, J.A. Beesley, Head of the Canadian Delegation to UNCLOS III, referring to the potential for disputes if agreement was not reached, spoke of “the kinds of disputes that will almost certainly lead to force.”
21.  The Law of the Sea: United Nations Convention on the Law of the Sea, United Nations, New York, 1983, at p xix.
22.  See, for example, speech by the Secretary of State for External Affairs to the Halifax Board of Trade, 25 February 1975.
23.  Supra note 6 at para 2(e).
24.  Ibid.
25.  See Canada-Newfoundland and Labrador Atlantic Accord Implementation Act, SC 1987, c 3; Canada-Newfoundland and Labrador Atlantic Accord Implementation Newfoundland and Labrador Act, RSNL 1990, c C-2.
26.  Supra note 6 at para 8.
27.  CBC News, “Dwight Ball wants Trudeau to review Atlantic Accord”, CBC News (13 February 2018), online: <https://www.cbc.ca/news/canada/newfoundland-labrador/dwight-ball-wants-sit-down-with-trudeau-1.4534195>.
28.  Ashley Fitzpatrick, “Meeting with PM about more than Atlantic Accord: N.L. premier”, The Telegram (11 April 2018), online: <http://www.thetelegram.com/news/meeting-with-pm-about-more-than-atlantic-accord-nl-premier-201151/>.
29.  New Zealand’s Continental Shelf Act, 1964 requires the Minister to specify royalties in permits and licences for areas on the continental shelf beyond 200 nautical miles “at the rate specified” in the permit or licence. In specifying the rate, the Minister “shall have regard to New Zealand’s rights and obligations under article 82 of [UNCLOS].” 1964 No 28, section 5A, inserted on 1 August 1996 by section 4 of the Continental Shelf Amendment Act 1996 (1996 No 71), as amended by subsections 7(1) and (2) of the Continental Shelf Amendment Act 2013 (2013 No 16).
30.  Norwegian Petroleum Directorate, News Release, “24th licensing round – announcement” (22 June 2017), online: <http://www.npd.no/en/Licensing-rounds/Licensing-rounds/24th-Licencing-round/Announcement/>.
31.  The issue of whether the U.S. should join UNCLOS has generated widespread controversy. See, for example, Stewart M Patrick, “(Almost) Everyone Agrees: The U.S. Should Ratify the Law of the Sea Treaty”, The Atlantic (10 June 2012).
32.  Bureau of Energy Management, “Lease Sale 250”, online: <https://www.boem.gov/Sale-250/>.
33.  US, Department of the Interior Bureau of Ocean Energy Management, Gulf of Mexico OCS Region, Lease Stipulations, Gulf of Mexico, Region-wide Oil and Gas Lease Sale 250: Final Notice of Sale, online: <https://www.boem.gov/Sale-250-Lease-Stipulations/>.
34.  Ibid, at para E.
35.  Ibid, at para J.