Newfoundland R&D dispute with oil companies heading for NAFTA showdown

The lingering dispute over R&D spending between Newfoundland and the oil companies exploiting offshore petroleum reserves has flared up into an intent to sue the federal and Newfoundland governments under the North American Free Trade Agreement (NAFTA).

The announcement by Exxon Mobil Corp and Murphy Oil Corp — operators of the Hibernia and Terra Nova oil fields — follows a decision by the Supreme Court of Newfoundland and Labrador against the oil firms. In early 2007, the court ruled in favour of the Canada-Newfoundland and Labrador Offshore Petroleum Board (CNLOPB).

At the heart of the dispute was a 2004 decision by the CNLOPB to set a 0.6% R&D, education and training levy based on production. The Board established the levy after consultations with the oil firms and according to the most recent average of R&D expenditures by oil and gas companies in Canada derived from Statistics Canada data.

But Exxon and Murphy say the production levy overrides provisions in the Atlantic Accord which is mute on how much the firms must spend locally on R&D.

Precise figures are hard to come by, but it's estimated that Petro-canada would have to pay $68 million based on an oil price of $32 a barrel, while the Hibernia Management and Development Co (Exxon Mobil, Chevron Canada, Petro-Canada, Canada Hibernia Holding Co, Murphy Oil and others) would have to pay $159 million based on a per-barrel oil price of $25.

The Supreme Court challenge by the oil companies to strike down the levy provisions was struck down by justice James Adams.

"The Board's decision to tie research and development expenditures to industry norms ... is a reasonable approach. It can be supported by the facts," stated Adams in a written judgement.

But that ruling is being appealed and the NAFTA challenge adds a new wrinkle to the dispute which could drag on for years.

CNLOPB officials won't comment on the legal dispute with the oil companies while it's before the courts but they assert that the levy remains in force. At stake is hundreds of millions of dollars in R&D, education and training funds although the CNLOPB provisions don't specify any breakdown between the two types of spending.

If the oil companies don't spend the required amount on their own, the remainder is to be deposited into a fund. Since offshore oil production commenced, R&D has been spent on everything from ice research to a new music facility at Memorial Univ. The $1.8-million Petro-Canada Hall was constructed in 2005 with a $1.2-million contribution from Petro-Canada.

R$