Canada is likely to be on the hook for untold millions of dollars in payments to the UN under its treaty obligations, according to a recent research paper by Mr. Wylie Spicer, Q.C. There is little reason to dispute this finding; the real question is who will ultimately bear the burden.
Canada became signatory to the United Nations Convention on the Law of the Sea (UNCLOS) in 1982 and ratified it in 2003. In scope and application, UNCLOS is broad and comprehensive. Given the structure of Canada’s legal system, UNCLOS is not self-executing. Consequently, Canada must enact domestic legislation to be in practical compliance with its international obligations.
Intent to be bound
As a preliminary matter, Canada’s obligations under UNCLOS appear to be binding. UNCLOS was intended to be taken as a package deal. Canada was an original signatory in 1982, and it acceded to the treaty to protect its economic interests. UNCLOS regulates offshore nickel mining and salmon fisheries in a manner beneficial to Canada. Arguably the most significant boon to Canada under UNCLOS, however, is Part VI, Article 76.
Context is required. UNCLOS has three distinct broad categories of coastal waters:
Each category entitles the coastal state to a distinct suite of rights. Generally speaking, this suite of rights progressively narrows in descending order under the above-mentioned breakdown. The high seas overlap with a subcategory known as the continental shelf. The continental shelf can extend beyond the 200-nautical mile limit, up to the outer edge of the continental margin. It entitles the coastal state to the exclusive right to explore and develop mineral resources – among other things – subject to the navigation rights of other states. Parts of the high seas extending beyond the continental shelf are a separate subcategory simply known as “area.”
Not all countries are endowed with a wide continental shelf. Some altogether lack it. In this regard, Canada is blessed. UNCLOS benefits Canada because Article 76 defines continental shelf generously. There was resistance to this in the lead up to UNCLOS. Poorer states, landlocked states, states with small coasts, and states with narrow continental shelves in particular were opposed to a continental shelf subcategory stretching beyond the 200-nautical mile exclusive economic zone. These states would have preferred to simply categorize the high seas beyond this limit as “area.” Had this been done, the rights to resources now situated in the continental shelf would vest in mankind as a whole, rather than simply in the sovereign coastal state.
That Article 76 is broad and favourable to Canada – and that dissenting states ultimately acceded to UNCLOS in its present form – is because Article 76 came at the expense of Part VI, Article 82. Basically, Article 82 requires that the signatory state make annual payments with respect to resource exploitation, including oil & gas production, situated in the state’s respective continental shelf beyond the 200-nautical mile limit. Article 82 refers to “all production” and grants a five year grace period, presumably to allow operators to recoup development costs, before requiring a percentage payment of the value of production. In the sixth year, this payment is 1 percent. It rises an additional 1 percent each year until it reaches a 7 percent maximum for the remaining life of the project. The amounts collected would then be paid by the signatory offshore producing state to an international body which would then distribute the payments to other signatories, with particular regard to land-locked and underdeveloped states. So Article 82 was a compromise, and an understandable one given that broad international acceptance would be desirable for a treaty purporting to govern a matter as comprehensive as the use of the sea.
Thus, Article 82 payments are the nub of the problem. A joint venture between Norway’s Statoil and Husky Energy is in the exploration stage of the Flemish Pass, situated approximately 300 nautical miles from the Newfoundland & Labrador (NL) coast and well within Canada’s continental shelf, but outside the 200-nautical mile limit of its exclusive economic zone. About 300 to 600 million bbl of recoverable oil have been discovered, and if this asset is developed, Canada’s Article 82 obligations will be triggered.
Because UNCLOS was only to be accepted as a package deal, because Canada was an original signatory in 1982, because Canada ratified it in 2003, because Canada adopted some elements of UNCLOS unilaterally before 1982, because Canada enacted domestic legislation to put into effect some UNCLOS provisions, because Canada achieved many of its aims through the present form of UNCLOS, and because Canada seemingly accepted Article 82 as the price of favourable provisions like Article 76, there are clear signs indicating that Canada acceded to UNCLOS with the full intention of being bound to it in whole.
The bottom line is that Article 82 is applicable. The issue is how it applies.
Federalism complicates matters
There is no clear indication of, or precedent for, how the requirements of Article 82 apply. This is because the issue has never advanced this far and also because the treaty left the details of implementation to the discretion of signatory states. Canada’s federal structure further complicates matters.
The legal regime governing NL offshore oil & gas production is overseen by the Canada – Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB), which among other things issues licenses for the exploration and development of the “‘offshore area'”. The C-NLOPB is a joint federal-provincial regulatory body and also a statutory product that resulted from the Atlantic Accord Memorandum of Agreement (the Accord) signed in 1985 between the federal government and the NL provincial government. It was subsequently enacted by legislatures on both levels. The Accord under §2 purports to provide for the development of offshore NL oil & gas to “benefit Canada as a whole and Newfoundland and Labrador in particular.” NL is recognized as the “principal beneficiary of the oil and gas resources off its shores, consistent with the requirement for a strong and united Canada.” Overall, §2 envisions treating NL offshore oil & gas resources as if they were land-based, likely in recognition of the fact that mineral resources are generally under provincial jurisdiction. Put differently, §2 intends to approximate the situation that would prevail were NL’s oil & gas resources situated on land. This might have important implications for the application of Article 82.
While offshore oil & gas production is ostensibly a matter of federal-provincial jurisdiction – reflected and perhaps necessitated by the joint nature of the C-NLOPB – the federal government has not asserted itself in any significant way with regards to the royalty structure of NL. In practice, operators interact only with NL representatives. Rather, the federal role appears to be administrative. Under existing federal-provincial and federal-NL agreements, the arrangement boils down to two prongs: 1) NL sets up the royalty regime and 2) operators pay said royalty to the federal government which then transfers it to NL.
To complicate matters even further, the NL royalty regime is not uniform. General royalty regulations apply to some plays, project-specific royalty regulations to others, and private contract agreements still to others.
Finally, despite the very real possibility that Canada could be the first state to make an Article 82 payment, it does not appear that any practical steps have been taken to comply. Indeed, it was not until 2013 that the C-NLOPB even made reference to the possibility of payments under Article 82 in its call for bids from potential operators.
What does it all mean?
The order of the day is uncertainty. It is uncertain who will pay up to 7 percent in royalties and also how these royalties will be paid.
Could NL be required to furnish the extra amount from its general revenues? It would be a tough sell, and grossly unfair to NL, given that land-based oil & gas producing provinces would have no similar burdens. It would also run counter to the Accord, which aims to situate NL in a position similar to that of land-based oil & gas producers. If NL were so burdened, would the province be required to tack on the relevant additional percentage points to its royalty structure? That would certainly undermine the competitiveness of its energy sector, not to mention alter those elements of its royalty structure that are subject to contractual agreements. It would also alter a balance that had previously been struck by the province’s own legislators.
Could the federal government demand that NL “take one for the team” to honour Canada’s treaty obligations under the “requirement for a strong and united Canada” qualifying language? This at least looks like a distant prospect, since Canadian federalism is nowhere near that heavy handed. Could Canada instead opt to pay the equivalent amount owed under Article 82 from its general tax revenues? That would broadly speaking be fair and sensible, considering that Canada as a whole signed onto UNCLOS, while provinces like NL had no direct say. It would also be consistent with the broad discretion as to execution embodied in UNCLOS. Finally, it would hardly matter to the UN body administering UNCLOS how the funds are collected.
Alternatively, could Canada alter the existing federal-NL regulatory structure to account for a new royalty payable to the federal government? That is, could the federal government step in and take its own cut? Could Canada approach offshore operators and compel the sale of a gross overriding royalty interest equivalent to the obligatory Article 82 amount? The former option would spare NL the political cost of raised royalties, but it would still work to undermine the relative competitiveness of its energy sector. The latter would be a novel and generous solution but it is doubtful that the federal government would consider it as a first option given that mineral rights vest in the Crown to begin with. That such rights vest in the Crown undermines any claim by operators under the doctrine of regulatory takings prevalent in the US. Leaving aside the federal-provincial Crown distinction, this latter option would nevertheless satisfy Canada’s treaty obligations while sparing NL from any damage to its economic competitiveness.
Thus, payment from general federal revenues or a compensated carve out of a separate gross overriding royalty “interest” would be the most consistent with honouring the Accord’s aim to situate NL similarly to land-based oil & gas producing provinces while also sparing NL from singly bearing the burden – in terms of lost competitiveness – for what is in essence a Canada-wide obligation. Any solution that fails to be so “competitiveness neutral” would unduly place the burden on NL alone.
Nevertheless, uncertainty abounds as to who will pay – Canada, NL, or oil & gas operators, the last of which would effectively be the same as making NL pay indirectly in terms of lost investment – and also who will compel payment, whether Canada, NL, or a foreign state taking the matter to an international tribunal. The lack of clear precedent, the intentional gaps UNCLOS left for states to fill, and Canada’s sluggish response to this potential problem leave more questions than answers at this point.