Offshore R&D spending dispute continues

Moira Baird
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Energy Oil companies, Ottawa file arguments with international tribunal

A $65-million NAFTA dispute between the federal government and a pair of oil companies is slowly wending its way through international arbitration.

At stake is tens of millions of dollars for research and development (R&D) activities in the province's offshore oil industry.

ExxonMobil's Canadian holding company and Murphy Oil Corp. say rules introduced in 2004 violate the North American Free Trade Agreement - requiring R&D expenditures "several times greater" than they would otherwise make in the Hibernia and Terra Nova oilfields.

A $65-million NAFTA dispute between the federal government and a pair of oil companies is slowly wending its way through international arbitration.

At stake is tens of millions of dollars for research and development (R&D) activities in the province's offshore oil industry.

ExxonMobil's Canadian holding company and Murphy Oil Corp. say rules introduced in 2004 violate the North American Free Trade Agreement - requiring R&D expenditures "several times greater" than they would otherwise make in the Hibernia and Terra Nova oilfields.

Ottawa says the companies' claims are exaggerated, unfounded and without merit. It argues the companies should be required to pay the costs incurred by the federal government in the arbitration process.

The matter is before the International Centre for the Settlement of Investment Disputes (ICSID), which has appointed a three-member arbitration tribunal.

The companies filed their claim with ICSID Aug. 3, 2009.

Ottawa filed its defence by the Dec. 1, 2009 deadline.

The documents were made public earlier this month, once confidential sections in both filings were redacted, or blacked out.

The dispute stems from rules introduced six years ago by the board that regulates the industry, the Canada-Newfoundland and Labrador Offshore Petroleum Board (CNLOPB).

All oil companies operating in the province must spend a percentage of their offshore oil revenue on research, development, education and training activities in Newfoundland and Labrador.

In 2008, for instance, the CNLOPB said all three oilfields on the Grand Banks generated $43 million in R&D spending commitments.

The federal government points out three Canadian courts have previously rejected the companies' claims.

Two of those courts also ruled the CNLOPB "acted within its regulatory authority" when it introduced the spending rules, said the federal documents filed with ICSID.

The federal government said the rules do not require the companies to target all the R&D spending strictly on oilfield operations.

The rules were also designed to create a "legacy in the province" from finite oil and gas resources.

The federal government argued there is plenty of capacity in the province to absorb additional R&D spending - and even if there isn't, the intention of the rules was to build that capacity in the first place.

Ottawa contends the oilfields have generated "significant revenues" for the companies, and it cites information ExxonMobil and Murphy Oil submitted to ICSID.

Hibernia generated revenues of $19.3 billion between 2004 and 2008.

During the same period, Terra Nova generated revenues of $10.7 billion.

Revenue projections for both oilfields during the years 2009-2036 have been blacked out in the federal documents.

Before 2001, the federal government said the offshore board was satisfied with the reported R&D spending by the oil companies.

In 2001, it noticed a decline in that spending.

"Concerned that the operators would not fulfil their obligation under the accord acts, the board immediately explained that it expected expenditures consistent with average expenditures on R&D by oil-extracting companies in Canada."

By 2004, those R&D expectations were clarified in the CNLOPB guidelines following 15 months of consultations - something the board had indicated it would do following the approval of development plans for Hibernia in 1986 and Terra Nova in 1997.

The federal government also points to a discrepancy between the companies' R&D expenditures in the normal course of business and those expenditures submitted to the CNLOPB.

Those figures are blacked out in the documents.

"The figures presented to the board are significantly higher than those submitted to this tribunal," said the federal submission.

Ottawa argues the difference between the two allows the companies to exaggerate their claim for damages prior to 2009.

ExxonMobil and Murphy Oil argue that approval of Hibernia and Terra Nova development plans by the CNLOPB also constituted approval of their R&D spending commitments, and that they should not be altered retroactively.

They're looking for $65.4 million in compensation over the life of Hibernia and Terra Nova: $50.5 million for ExxonMobil, $14.9 million for Murphy.

The companies are also seeking interest and taxes on all money awarded; all costs associated with the arbitration proceedings, including professional fees and disbursements; and any other relief the tribunal deems appropriate.

The companies argue that the 1994 free trade agreement prohibits the kind of local-content requirements in place for oil developments off the coast of Newfoundland and Labrador, and an exception was made in the province's case.

"Canada's treaty partners allowed it to keep the local content requirement that existed in 1994, but they did so based on Canada's explicit obligation not to put into place any new local content requirement or make the one existing in 1994 more restrictive," said documents the oil companies submitted to ICSID.

Ten years later, they said, Canada breached that obligation when the board introduced the R&D spending guidelines.

"The guidelines are far more restrictive than the local content measures that existed in 1994," said documents the companies submitted to ICSID.

The companies said those rules will force them to spend an additional $189 million over the lifespans of both oilfields - $121.7 million for Hibernia until 2036 and $67.3 million for Terra Nova until 2018.

"Because there is no business need for the level of R&D mandated by the guidelines, project operators will have to fabricate ways to spend enough money to satisfy the board's development objectives," the documents said.

"Where there is a lack of opportunity or capacity in the province to absorb the excess spending, the interest owners will simply have to give the money away."

The companies said R&D requirements for Hibernia and Terra Nova oilfield operations is expected to decrease "because each project has advanced significantly in its life cycle.

"As a general rule, upstream petroleum projects require more R&D early on, when the facility is designed and constructed, than they do in the production phase, at which point the technology has largely been proven."

The companies said R&D spending has been significant for both projects, "in particular for Hibernia, due to technological needs."

The Hibernia consortium reported more than $226 million in R&D spending on the project between 1990 (when construction began at Bull Arm) and 2008.

Petro-Canada, now known as Suncor Energy and the operator of the Terra Nova oilfield, reported R&D spending or more than $24 million between 1997 (when work began) and 2008.

mbaird@thetelegram.com

Organizations: Hibernia, ICSID, Petro-Canada Suncor Energy

Geographic location: Canada, Terra Nova, Newfoundland and Labrador

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Recent comments

  • Greasy
    July 02, 2010 - 13:25

    Put the money in a trust fund for future R&D and make interest on it. Heck, provide free education to those entering the oil industry. Be creative. Big Oil is just bring Big Greedy again. We are talking about thousandths of a penny for every dollar pure profit Big Greedy makes. 65 million dollars ? I guess they have a new employee who will be needing a Christmas bonus this year.

  • Dave in NL
    July 02, 2010 - 13:12

    The applicant's claim that there is insufficient R&D capacity in the province is 100% correct. Memorial does not have the capacity to conduct the scale of research contemplated by the guidelines AND provide results. It sure has the capacity to blow through tens of millions of dollars and NOT yield anything!
    Witness the one energy research chair pulling out over a year ago.
    Over $60million spent in the Monetary Black Hole on the Parkway after the original Hibernia agreement was signed did not deliver on the commitment to build oil & gas capacity. Check the results against the promises. Tens of millions more vapouried in Memorial's Pan-Atlantic Petroleum Consortium and Offshore Oil & Gas Development Partnership...without delivering on results.
    The oil companies are right to be concerned about investing their money poorly.

  • Greasy
    July 01, 2010 - 20:11

    Put the money in a trust fund for future R&D and make interest on it. Heck, provide free education to those entering the oil industry. Be creative. Big Oil is just bring Big Greedy again. We are talking about thousandths of a penny for every dollar pure profit Big Greedy makes. 65 million dollars ? I guess they have a new employee who will be needing a Christmas bonus this year.

  • Dave in NL
    July 01, 2010 - 19:50

    The applicant's claim that there is insufficient R&D capacity in the province is 100% correct. Memorial does not have the capacity to conduct the scale of research contemplated by the guidelines AND provide results. It sure has the capacity to blow through tens of millions of dollars and NOT yield anything!
    Witness the one energy research chair pulling out over a year ago.
    Over $60million spent in the Monetary Black Hole on the Parkway after the original Hibernia agreement was signed did not deliver on the commitment to build oil & gas capacity. Check the results against the promises. Tens of millions more vapouried in Memorial's Pan-Atlantic Petroleum Consortium and Offshore Oil & Gas Development Partnership...without delivering on results.
    The oil companies are right to be concerned about investing their money poorly.