Ottawa, N.L. unsure who will pay UN tax on new oil finds
United Nations pact provides cash to developing countries from production beyond 200 miles
Neither Ottawa nor the Newfoundland and Labrador government can say who is on the hook for fees payable to the United Nations for new oil finds pumped beyond Canada’s 200-mile exclusive economic zone.
Questions surrounding the international tax — first raised a decade ago, and largely theoretical until now — have come into much sharper focus following recent announcements of major oil discoveries in a new frontier of the Newfoundland offshore.
Statoil says it has discovered hundreds of millions of barrels of recoverable oil in the Flemish Pass, roughly 500 kilometres from St. John’s. That’s beyond the 200-mile limit.
Any future production in the area would be affected by an international agreement Ottawa signed 10 years ago.
The United Nations Convention on the Law of the Sea (UNCLOS) requires coastal states like Canada to “make payments or contributions in kind in respect of the exploitation of the non-living resources of the continental shelf beyond 200 nautical miles.”
So who pays? No one knows — at least not yet.
The manner in which Article 82 of the United Nations Convention on the Law of the Sea will be implemented in Canada has not yet been determined.- Foreign Affairs spokesman John Babcock
“The manner in which Article 82 of the United Nations Convention on the Law of the Sea will be implemented in Canada has not yet been determined,” John Babcock, a spokesman for Foreign Affairs, Trade and Development Canada, said in an emailed statement to CBC News.
“However, Article 82 payments should be sourced from the benefits stemming from the associated offshore activity.”
The Newfoundland and Labrador government declined interview requests, but sent out a statement on behalf of Natural Resources Minister Derrick Dalley.
“The details of how such a regime would operate, and who would make payments or contributions, are still under development by Canada (as the coastal state) and other signatories of UNCLOS,” the emailed statement noted.
There is a potentially huge amount of money at stake — the UN tax tops out at seven per cent of the value or volume of production at the site.
Keith Miller, a partner with the law firm Stikeman Elliott in Calgary, says UNCLOS has implications for the East Coast oil industry.
“In the case of Newfoundland, the offshore petroleum board can regulate the exploration and ultimate production of resources outside or beyond 200 miles as it can within the 200 miles,” Miller, who specializes in energy regulatory law, told CBC News.
“But beyond 200 miles it raises an interesting issue … an international tax that is provided for under the treaty.”
It really is intended to be a transfer of wealth between the have states and the have-not states.- lawyer Keith Miller
To Miller’s knowledge, the tax has yet to be collected anywhere in the world, but that could soon change.
Officials with the relevant UN agency — the International Seabed Authority — met in Beijing last year to develop guidelines on how to implement Article 82 payments.
The tax — which starts at one per cent of total production value, before gradually increasing to seven per cent — is aimed at helping less-fortunate nations.
“It really is intended to be a transfer of wealth between the have states and the have-not states,” Miller said.
He says there are no firm answers at this point on who pays.
“The treaty obligation is Canada’s obligation. So in theory — or, at least, I guess applying a treaty — it falls to Canada. But the actual sharing of that is something that will go deeper than that, because if there is this liability, I would expect that the federal government will want to have that shared as well.”
Extending continental shelf
In order to retain jurisdiction over areas of the continental shelf beyond 200 miles, Canada must make its case to a UN body.
Technical and scientific work has been underway for years, and Canada’s final submission will be made in December.
If the UN body accepts Canada’s claim, Ottawa’s jurisdiction will be confirmed in areas beyond 200 miles, including the Flemish Pass.
According to Miller, the extended jurisdiction applies to only oil, not fish.
And the UN tax under Article 82 will then apply to any potential oil production in areas beyond 200 miles.
Issue 1st identified a decade ago
While no one knows who will be on the hook for payments, federal officials first identified UNCLOS as an issue a decade ago, shortly after Canada signed onto the agreement.
Briefing papers prepared in 2004 for the incoming natural resources minister, John Efford, warned that “this issue bears significant federal-provincial impacts."
The 2004 briefing papers noted that Ottawa was “in the process of developing a federal strategy to engage NL on the question of sourcing” the payments.
At the time, Danny Williams, the then-premier of Newfoundland and Labrador, put the responsibility at Ottawa’s door.
“They created a problem for us, and they’ve also created a problem for industry in the province,” Williams said in response to media questions in 2004.
"So if anything has to be paid to any participating countries, then in fact that has to be borne by the federal government, certainly not us.”
Fast forward nearly 10 years, and there is still little clarity on the matter.
And now there is a significant oil find beyond 200 miles.
Statoil recently told The Canadian Press that Bay du Nord in the Flemish Pass Basin is the 12th-largest oil discovery in the world in the past four years.
The company has also struck oil at its nearby Mizzen site. Assessments are still underway at a third location, Harpoon.
While estimates of recoverable oil have exceeded the amount Statoil has said are necessary to make the Flemish Pass Basin viable, potential production remains years down the road.