01 April 2007

Which is to be Master? Part 2

C. Ownership of resources offshore Newfoundland and Labrador

The Blue Print does not define the phrase “jurisdictional control”, although it clear commits a Progressive Conservative government to seeking it. There term is not specific and there is no plain language interpretation of the words which can give any clue as to their meaning.

Jurisdictional control could mean co-management. If that is so, then the Atlantic Accord already establishes that right. Jurisdictional control could mean ownership. Ownership of offshore resources was resolved in the Supreme Court of Newfoundland (Court of Appeal) and the Supreme Court of Canada. While the reasoning of both courts was slightly different, both held that the Government of Canada held all rights to offshore oil and gas resources and any other mineral resources beyond the 12 mile territorial sea surrounding Newfoundland and off the coast of Labrador.

The Government of Newfoundland and Labrador did not establish any reservations or objections on resource ownership when it signed the Atlantic Accord in February 1985. As such, barring the ruminations of some clever lawyer or comments from the province’s pseudo-nationalist community, Newfoundland and Labrador’s legal claim to offshore resource ownership ended 20 years ago.

The only way this matter could be revisited is on the basis of a political agreement between the Government of Canada and the Government of Newfoundland and Labrador. It is beyond the scope of this paper to review in detail the likelihood of such an agreement. It should be instructive to observers, however, that the Government of Newfoundland and Labrador has not elected to pursue its current proposal on the basis that the offshore resources belong to this province as a matter of right.

D. Provincial Offshore Revenues

Brian Mulroney’s proposal on offshore oil and gas resources, dated 14 June 2004, provided that “Newfoundland will be entitled to establish and collect resource revenues as if these resources were on land.” Mulroney’s proposal contained 15 provisions covering the areas of management, revenue sharing, Crown share, local benefits, Equalization offset, entrenchment of the agreement in the Constitution and implementation.

That single sentence, however, contains the essence of the Mulroney proposal on revenue sharing: the provincial government gains the right to set its revenues as if the resources were within its jurisdiction. The Government of Newfoundland and Labrador determines its direct revenues by legislation and through specific development agreements for each of the three projects currently producing oil offshore Newfoundland and Labrador. There is no discussion in publicly available documents that indicates the Mulroney government intended the province to receive a defined percentage of revenues.

Sections 36, 37 and 38 of the Atlantic Accord define the basis of revenue sharing between the Government of Canada and the Government of Newfoundland and Labrador, establish a definition of revenues to be collected by the Government of Newfoundland and Labrador and set a mechanism as to how these revenues are to be collected. Section 37 states:

On the basis of the foregoing, Newfoundland shall receive the proceeds of the following revenues from petroleum related activity in the offshore area:

(a) royalties;

(b) a corporate income tax which is the same as the generally prevailing provincial corporate income tax in the province;

(c) a sales tax that is the same as the generally prevailing provincial sales tax in the province;

(d) any bonus payments;

(e) rentals and licence fees; and,

(f) other forms of resource revenue and provincial taxes of general application, consistent with the spirit of this Accord, as may be established from time to time.

While the Atlantic Accord (Section 38) provided that these revenues were to be collected by the Canada-Newfoundland Offshore Petroleum Board (CNOPB), these revenues are actually collected by Natural Resources Canada (NRCAN) with the consent of the Government of Newfoundland and Labrador. They are remitted by NRCAN in full to the provincial government.

The Government of Newfoundland has never released the full amount of direct revenues it receives under these provisions of the Atlantic Accord. The only figure to be made public is the royalty amount, which Premier Danny Williams stated was $123.8 million in 2003. No one has indicated that these revenues are reduced before the provincial government receives them or that the provincial government is required to remit any of these revenues to the federal government.

E. Equalization and the Accord’s offset provisions

The current provincial proposal to amend the Atlantic Accords focuses on its Equalization offset provisions. Brian Mulroney stated definitively in his letter of 14 June 1984 that the Government of Newfoundland and Labrador should not see a “dollar-for-dollar” decline in Equalization as revenues from offshore development increased. In light of the provincial government’s current argument it is interesting to note that Mr. Mulroney did not include the idea of Equalization offsets in the section of his proposal dealing with revenue sharing. Rather, it was contained as a separate provision in the original letter, in the Atlantic Accord and in the implementation legislation that followed.

From the outset of this discussion, it is important to appreciate the premise of Equalization and how the program operates. Officially, Equalization is a “[f]ederal transfer program that allows all provinces, regardless of their ability to raise revenue, to provide roughly comparable levels of services at roughly comparable levels of taxation. Eligibility to receive equalization funding is determined by a formula measuring each province's revenue-raising capacity against a five-province standard. Currently, eight provinces receive equalization: Newfoundland, Prince Edward Island, Nova Scotia, New Brunswick, Quebec, Manitoba, Saskatchewan and British Columbia.” Two provinces do not receive Equalization. No provincial government pays into Equalization since the program funds come out of the federal government’s general revenues.

Essentially, Equalization is a top-up scheme for provinces. The federal government determines a national standard amount each province should theoretically be able to raise from its own sources of revenues. These “own-source” revenues include royalties on resources, personal income tax, corporate tax, sales tax, park fees, vehicle licensing fees and so forth. The federal government then compares the provinces actual income against the per person standard. A provincial government falling below the average gets a cheque for the difference. Meet or exceed the standard and a province will get nothing.

It is also important to appreciate that there is no indication that the either the federal government or the provincial government intended that the Atlantic Accord would exempt Newfoundland and Labrador from the Equalization program. There is no provision which allows offshore oil and gas revenue to be treated differently in the calculation of Equalization entitlements. Rather, Brian Mulroney’s initial offer to the province is perfectly clear: “The Current [sic] Equalization provisions will apply”. The overhead slide presentation, in fact confirms that the Equalization program was understood to apply to oil and gas revenues.

Section 39 of the Atlantic Accord provides the Government of Newfoundland and Labrador with an Equalization offset payment in addition to its direct revenues. According to Brian Mulroney, for the first four years the province would receive an amount equal to “90% of a year’s reduction in equalization payments. Beginning in the fifth year of production, this offset rate would be reduced by 10% for each subsequent year.”

The trigger for the offsets was production of a specific quantity of oil, irrespective of the price per barrel of oil or the overall economic impact of the production. The offset was triggered in 1999/2000 and will expire in 2011/2012. In 2003, the federal government transferred $178.0 million to the Government of Newfoundland and Labrador under this provision of the Accord. The total of royalties plus offsets was $301 million in revenue to the Government of Newfoundland and Labrador in 2003. Since the Premier has only discussed specific figures for royalties in public, total direct revenues may be higher. Indirect revenues have not been made public.

Continued in Part 3