N.L. could be missing out on oil royalties: auditor general

The Newfoundland and Labrador government could be missing out on royalty revenue from offshore oil production due to overdue or incomplete audits of the companies involved.
Auditor General Terry Paddon says the province could be losing out on extra oil royalties due to problems with its auditing system. (CBC)

The Newfoundland and Labrador government could be missing out on royalty revenue from offshore oil production due to overdue or incomplete audits of the companies involved.

That's just one of several problems Auditor General Terry Paddon identified in his review of oil royalties in his annual report released Thursday.

The Department of Natural Resources is responsible for administering and monitoring petroleum projects and related oil royalties paid to provincial coffers. The department also has a royalties division devoted to the audit process.

Paddon reviewed the books to make sure the department has systems and practices for monitoring the completeness and accuracy of oil royalties received from project owners.

His conclusion? They could be doing much better, and possibly receiving more money in the process.

"The division needs to improve the timeliness of auditing oil royalties and project costs submitted by the various project owners and operators of the province's five producing oil projects," Paddon said, noting many audits begin too late in specified audit periods.

"This could result in them not being completed if unforeseen circumstances arise, such as staff vacancies. If audits are not issued within the required timeframe as a result of delays, royalties for that period would not be subject to audit reassessment, resulting in possible lost revenues to the province."

Dependent on royalties

It's no secret Newfoundland and Labrador relies heavily on oil money to fund projects and programs that run the gamut.

Paddon gives specific examples of that, noting oil royalties accounted for almost $2 billion or 25 per cent of all provincial revenues in fiscal 2013. And that's down from 2012 when the government took in $2.8 billion, or 32 per cent of revenue for that year.

That compares to about $85 million in 2003.

The recent dip may also reflect the level of current activity offshore. The AG noted the Hibernia and Hibernia South fields have yielded about $7 billion dollars in royalties since production began in 1997. But the report also shows more than half of the total reserves in those fields have been exhausted.

Likewise for the Terra Nova field, which has paid out $5 billion in royalties since production began in 2002, but is also on the downswing with 340 million of the estimated 506 total reserves produced. White Rose, which came on line in November 2005, has already produced about 180 million of the estimated 232 million total reserves in that field for royalties of $2.7 billion.

A third of the White Rose Expansion field has already been produced, which has translated into about $35 million for the province, while Hebron, which has estimated reserves of 707 million barrels, is due to start production in 2017.

Paddon said there are many benefits of timely audits, beyond the importance of meeting deadlines set out in the act.

"Audit work can be more efficiently and effectively performed if conducted closer to the reporting period, the availability of company staff that were present during the royalty audit year, additional royalties can be collected promptly, and future royalty calculations can take advantage of audit recommendations and rulings," he said.

Paddon also took issue with extra money being spent on external consultants to do some of the audits.

His report found that fees for outside auditors ranged from $85 an hour for secretarial duties to $340 an hour for senior audit staff. That compares with about $40 to $64 for department audit staff.

The government paid out more than $500,000 to external auditors for fiscal 2013 alone.

"Although these consultant services were deemed necessary to ensure audits were completed within the required deadlines, the cost associated with these services suggests that the department should review the adequacy of its internal structure and resources."

The auditor general said his office also identified limited access to information from the Hibernia project operator, Hibernia's and Terra Nova's transportation costs, outdated audit manuals, and contract fees paid in excess of approved rates.