07 July 2009

NALCOR may be exempted from offshore royalty payments

If the provincial government acts on a provision of the Hebron fiscal agreement, the government’s own energy corporation could wind up paying nothing to the provincial treasury in royalties.

That would set it apart from any other offshore interest holder,  including the federal government’s Canada Hibernia Holding Corporation (CHHC).

Under sections 8.4 of the Hebron fiscal agreement, the Hebron partners agree that the provincial government can “make amendments to the Petroleum and Natural Gas Act”…, “make amendments to the Royalty Regulations” or “make an agreement pursuant to section 33 of Petroleum and Natural Gas Act…to adjust, vary or suspend OilCo’s liability for the payment of royalties on oil produced from the Lands”  that would be different from the arrangements with the other project partners.

That provision  - which could see the province’s own oil company pay nothing at all in royalties - might also violate the agreement that is the basis for the province’s offshore wealth.

Under section 41 of  the 1985 Atlantic Accord memorandum of understanding between Ottawa and St. John’s,  “Crown corporations and agencies involved in oil and gas resource activities in the offshore area shall be subject to all taxes, royalties and levies.”

That section was intended to put any Crown corporation operating offshore, federal or provincial,  on the same footing as a private sector corporation.

That section applies to CHHC and should also cover NALCOR Energy.

The provision of the agreement appears to take advantage of hasty 2001 amendments to the Petroleum and Natural Gas Act which gave the provincial government the ability to make an agreement on royalties that differed from the generic royalty regime.

Although the changes to the province’s fundamental oil and gas law were substantive, the entire set of amendments passed through the House of Assembly in a single evening with only three speakers.

Energy minister Lloyd Matthews described the changes as “administrative.”  He did not give any detailed discussion of any amendment, and simply glossed over the section on royalty agreements – the new section 33 – as if it was nothing more than a change of numbering.

John Ottenheimer, the opposition energy critic at the time and now the chair of NALCOR Energy’s board of directors,  spoke on the bill but made absolutely no reference to the details of the changes concerning royalties and variance to royalty arrangements.

That’s surprising given that the opposition leader at the time had already begun to speak publicly against give-away resource deals. Section 33 set the legal stage for just such a give away.

Jack Harris also spoke on the bill, spending considerable time criticising the existing royalty regimes.  He made no reference to the substantive changes the bill made to the Petroleum and Natural Gas Act.  That’s surprising since section 33 gives the government the right to sign a royalty deal which wasn’t even as lucrative as the existing regimes which he was criticizing. 

Then opposition leader Danny Williams made no comment at all on the bill during debate.

There’s no way of knowing at this point if a similar provision exists in the deal on Hibernia South. Details of the fiscal agreement on that project have not been made public.