The Province of Newfoundland and Labrador introduced a new
generic offshore oil royalty regime on November 2, 2015. The new
royalty regime is intended to apply to all projects going forward,
including those to whom exploration and significant discovery
licenses have already been issued.
High-level details of the new royalty regime can be found here
[PDF]. Generally speaking, under the new royalty regime rates will
increase as a project becomes more profitable with the highest rate
(50%) being payable by projects that have returned $3 for every $1
The new regime is subject to the development of regulations
under the Petroleum and Natural Gas Act (the Act), which
the Province expects will be completed in early 2016.
In his press conference, Hon. Derrick Dalley, Minister of
Natural Resources, heralded the new regime as providing fiscal
certainty with competitive rates for Newfoundland and
Labrador's offshore industry.
While such certainty is undoubtedly appealing, we are highly
skeptical that this new regime will provide that certainty. Most of
the projects offshore Newfoundland and Labrador are subject to
fiscal agreements between the project proponents and the Province.
Many of these fiscal agreements have been entered into by the
Province pursuant to section 33 of the Act, which permits the
Province and project proponents to enter into royalty agreements
that are inconsistent with and prevail over any royalty regulations
promulgated under the Act (such as the regulations to implement
this new royalty regime). The Province has not given any indication
that it intends to amend or repeal section 33 of the Act. As a
result, the Province and project proponents will still be able to
enter into project specific royalty agreements that supersede this
new royalty regime, and given the massive costs associated with
such projects and the impact that the royalty regime has on the
economic viability of any project, we expect this practice to
In addition, recent discoveries in the Newfoundland and Labrador
offshore area may be subject to another royalty payable pursuant to
the United Nations Convention on the Law of the Seas (UNCLOS).
Projects that lie beyond Canada's 200 nautical mile exclusive
economic zone that extract resources from beneath Canada's
continental shelf may be subject to a royalty of up to 7%, payable
to the International Seabed Authority. Article 82 of UNCLOS sets
forth this requirement and it remains to be seen how and by whom
this royalty will be paid.
The potential for a new government (with a provincial election
expected to be called for November 30, 2015), practices of past
governments and the unsettled issue of the UNCLOS royalty payment
suggest that the new royalty regime is anything but certain.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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