08 April 2019

The Atlantic Accord: background to the 1985 agreement #nlpoli

The Atlantic Accord functions in Newfoundland and Labrador politics in two ways.  There is the agreement between the Government of Canada and the provincial government that established the joint management framework for the Newfoundland and Labrador offshore. At the same time, there is the political prop and the associated mythology that has, in largest measure, replaced the actual agreement in both the popular and political/bureaucratic understanding of it.

Provincial Concerns and Objectives

The Atlantic Accord ended a decade of often acrimonious dispute between the federal and provincial governments over offshore oil and gas resources.  The province had initially staked its claim to ownership of the resource in 1975, based on the premise that Newfoundland and Labrador brought the resources with them at the time of Confederation and had retained jurisdiction over them.

The Supreme Court of Canada ended the dispute in its decision on a reference from the Government of Canada.  The Court found that, for several reasons, the right to explore and exploit offshore resources and the legislative jurisdiction to do so lay with the federal government. The court decided that, in addition to other considerations, control of the offshore was a function of Canada’s international status.  Under the Terms of Union, this part of Newfoundland’s pre-Confederation legal status transferred to the federal government.

The Supreme Court of Newfoundland and Labrador Court of Appeal addressed a reference from the provincial government that also concluded the federal government had jurisdiction over the offshore.

Regardless of the issue of legislative jurisdiction, the Government of Newfoundland and Labrador had five areas of public policy with which it was concerned.  Legislative jurisdiction would have allowed the provincial government to address those.  Cabot Martin, then an advisor to the provincial government, described the five policy considerations in a 1975 article in the Ottawa Law Review.

They were:
  • public revenue generation,
  • industrial development,
  • social disruption,
  • provincial autonomy, and
  • effective administration.
The provincial government had settled on these issues as a result of a detailed analysis of the experience in Canada, such as the dispute between Alberta and the federal government after the 1973 oil crisis.  The provincial government was also aware of the potential for social disruption caused by the sudden influx of money and people from outside. 

Thus, provincial administration would give ensure that resources were developed in a way that would minimize rapid social and economic disruption in Newfoundland and Labrador while maximising provincial revenues.  It would also allow the provincial government to extract local industrial and commercial development as a price paid by oil companies for exploiting offshore resources. The development of an industry based in Newfoundland and Labrador and capable of doing work globally in the industry was a key part of ensuring that the local offshore provide both immediate and lasting benefits.

Most important among provincial objectives was the ability to set and collect revenues.  Provincial officials, politicians and public servants alike, were acutely aware of the promise that oil and gas development would change Newfoundland and Labrador into a prosperous province.  The provincial government throughout the 1970s and 1980s relied on federal transfer, including Equalization, for at least half of its annual revenues.  The opportunity to become a “have” province was at the heart of the provincial government’s interest in control of offshore resources.

The provincial objectives can be summarized under three broad headings:
  • Provincial control and administration,
  • Revenue that would end dependence on federal hand-outs, and
  • Local benefits.

The Mulroney Proposal

The Atlantic Accord is as much a child of politics as of policy.  While the Supreme Court had settled the legal and constitutional question about oil and gas offshore Newfoundland and Labrador, decisions about the future development and management of the resources were political.
Brian Mulroney was leader of the Progressive Conservative Party and Leader of the Opposition when the Supreme Court of Canada delivered its decision.  After the decision, he wrote to the premiers of Nova Scotia and Newfoundland and Labrador to propose an agreement that he would deliver if he became Prime Minister after the 1984 General Election.

The Mulroney proposal “would recognize the right of Newfoundland and Labrador to be the principal beneficiary of the wealth of the oil and gas off its shore, consistent with a strong and united Canada.”  This sentence appears in the second paragraph of Mulroney’s letter. It sets one of the basic principles contained in the subsequent agreement.
This phrase is particularly interesting since the idea that the province would be the “principal beneficiary” had not previously appeared in public discussions of offshore resources.  Federal proposals before then had allowed the provincial government to collect some share of offshore revenue.

The term “principal beneficiary” is undefined in Mulroney’s original letter and it remains undefined in the Atlantic Accord.  It is clear from the letter and the subsequent Atlantic Accord, that the Mulroney proposal would benefit the province in three significant ways.

First, the provincial government would gain the right to manage the offshore jointly with the federal government.  The federal interest would be paramount until national self-sufficiency in oil supply had been reached.  Otherwise, the province would take the lead.  

Second, the provincial government gained the right to collect revenues from the resources as if they were on land. Unlike earlier federal proposals, the provincial government would determine its own revenues to be collected from offshore oil and gas development and production.  This gave the province the same control of offshore oil and gas that it had on forestry and mining. The federal government would only collect business and personal taxes of the kind it collected in every province.

Third, the province would benefit from the development of local jobs and a local offshore-related industry. Mulroney committed that oil-related infrastructure would be sited in the province, where possible. “Local job creation and labour development would be of paramount concern,” Mulroney wrote.

Mulroney also committed that the provincial government would not see a dollar-for-dollar loss of Equalization payments.  Equalization is a federal program that transfers a portion of federal general revenues to each of the provinces whose own-source revenues fall below a national standard.  Embedded in the constitution in 1982, Equalization gives provinces comparable incomes but does not deal with outcomes, that is, how each provincial government spends the money.

As a provincial government’s own-source revenues increased, its Equalization payments would normally reduce by an equal amount. Cabot Martin’s article included a reference to Equalization as a key since, in the worst-case scenario, oil production would merely displace some or all the province’s Equalization payments but give it no more revenue beyond that. This would leave the provincial government as a “have” province like Ontario or Alberta while being financially in the same relative place it had been before oil production started. 

The Atlantic Accord

After months of sometimes tense negotiations,  the provincial and federal governments signed an agreement in February 1985 called the Atlantic Accord. It established a system of joint federal and provincial management of the offshore and laid out the basis on which offshore revenues would be shared.

Clause 2 of the Accord sets out the objectives of the agreement, called “purposes” in the document:

(a) to provide for the development of oil and gas resources offshore Newfoundland for the benefit of Canada as a whole and Newfoundland and Labrador in particular,

(b) to protect, preserve, and advance the attainment of national self-sufficiency and security of supply,

(c) to recognize the right of Newfoundland and Labrador to be the principal beneficiary of the oil and gas resources off its shores, consistent with the requirement for a strong and united Canada,

(d) to recognize the equality of both governments in the management of the resource, and ensure that the pace and manner of development optimize the social and economic benefits to Canada as a whole and to Newfoundland and Labrador in particular,

(e) to provide that the Government of Newfoundland and Labrador can establish and collect resource revenues as if these resources were on land, within the province,

(f) to provide for a stable and fair offshore management regime for industry,

(g) to provide for a stable and permanent arrangement for the management of the offshore adjacent to Newfoundland by enacting the relevant provisions of this Accord in legislation of the Parliament of Canada and the Legislature of Newfoundland and Labrador and by providing that the Accord may only be amended by the mutual consent of both governments, and

(h) to promote within the system of joint management, insofar as is appropriate, consistency with the management regimes established for other offshore areas in Canada.

The first two objectives establish the national purpose of the agreement: firstly, to allow development to the benefit of the whole country, generally, and Newfoundland and Labrador, in particular, and, secondly, to ensure that Canada has a secure supply of oil and gas.

The third objective – that Newfoundland and Labrador would be the principal beneficiary - is taken word-for-word from Mulroney’s letter.

The fourth objective establishes the equality of both governments in management of the offshore.  Note that this objective also mentions a specific concern of Newfoundland and Labrador to “ensure that the pace and manner of development optimize the social and economic benefits” to the country and to the province.

The fifth objective affirms Mulroney’s commitment to allow the provincial government to set and collect resource revenues as if the resource lay constitutionally within provincial jurisdiction.

The sixth and seventh objectives commit the government to establish a stable, fair, and permanent management regime.  Note that this objective recognizes the need of the industry for stability and fairness since the governments anticipated that it would be the private sector that led offshore development. 

Clause 39 of the Atlantic Accord describes a series of payments that the federal government would make to the provincial government to offset any declines in Equalization payment that resulted from new offshore revenue.  The Equalization offsets would start in the first year of oil production and, in the fifth year, would decline gradually until finishing completely in the 12th year after oil production started.

Have not no more

Clause 64 of the agreement allowed for constitutional entrenchment of the Accord’s provisions:
The Government of Canada agrees that should the Government of Newfoundland and Labrador achieve the requisite support among the other provinces for the constitutional entrenchment of the Accord that it would introduce a mutually agreeable resolution into Parliament.

That may seem ambitious or pretentious but it is too easy to forget that the Atlantic Accord is a document about how Canada functions as a country. It is a reminder that while the constitution contains both written and unwritten provisions, there is room for an adjustment in those provisions to meet the needs of a particular situation.  The constitution is a skeleton legal framework but the tissues, sinews and blood that make it live for Canadians is political.

The Accord took the constitutional framework and made an adjustment to it, one that adapts the fundamental principles of the framework to a new situation.  The parties expressly intended it to be a permanent alteration to the relationship between Ottawa and Newfoundland and Labrador but the agreement also contains provisions that it can be used as a template for other provinces in the future.

The Accord also fundamentally transferred Newfoundland and Labrador.  Politicians and public servants in the 1970s examined the potential of the offshore.  They looked around the world for examples of both the good and bad consequences of oil wealth.  They adapted that knowledge to the unique situation in Newfoundland and Labrador and set objectives that they believed would allow the province and it people to develop oil and gas resources in a way that proved both immediate and lasting benefits to them.

In the Atlantic Accord, they found an agreement with the federal government that met their objectives.  Five years after the Atlantic Accord,  the Government of Newfoundland and Labrador reached an agreement with the original partnering oil companies. By 2003,  three of the four major discoveries offshore were either in production of under development producing hundreds of millions of dollars in oil revenue for the provincial government. Local companies worked offshore and used that experience to win contracts around the globe.

Oil and gas exploration and development accounted for $7.5 billion or 34% of the provincial gross domestic product in 2006.  In 2008,  21 years after the first barrel of oil came out of a Hibernia production well,  the provincial government reached the goal sought 33 years earlier:  it no longer qualified for Equalization. 

Have not was no more.  


Tuesday:  The 2005 and 2019 Federal-Provincial Agreements