Agreement on the Atlantic Accord

April 8, 2019

On Monday 1 April 2019 the Government of Canada and the Government of Newfoundland and Labrador announced a deal described as an agreement to amend and update the Atlantic Accord.

The 2019 Agreement

The original Atlantic Accord, agreed between Canada and the Province in 1985, was a comprehensive document which established the joint management system for petroleum development currently in place for the Newfoundland and Labrador offshore. It included the requirement that the Province would be the “principal beneficiary” of the offshore, the joint management arrangement through the Canada-Newfoundland and Labrador Offshore Petroleum Board (“CNLOPB”), and the schemes for licensing, development approvals and for the Province to set and collect royalties.

This 2019 Agreement consists of two parts. The first is a financial arrangement, whereby Canada agrees to provide the Province with a revenue stream based upon Canada’s expected dividends from Canada Hibernia Holding Corporation (“CHHC”). The payments will commence immediately in 2019, and extend to 2056. The total nominal payout over the period will be just over $3.3 billion; however commencing in 2045, the Province will begin eight annual repayments of $100 Million, making the net nominal payment to the Province over the term of the arrangement just over $2.5 Billion. The payment schedule is designed to be front-end loaded, with $1.9 billion of the $2.5 billion to be received by 2030 on an average annual payout of $160 million in that period.

The second part of the Agreement is a series of commitments and acknowledgements expressed as being made in consideration for this revenue arrangement. They include:

  • An acknowledgement that the review under the 2005 Atlantic Accord is now completed;
  • An acknowledgement of marine protected areas and refuges, and the permission of petroleum exploration on the Northeast Slope Marine Refuge and the restriction of activity in the proposed Laurentian Channel Marine Protected Area; and
  • A commitment to spend the next two years in discussions to “deepen” the joint management regime.

Analysis

The Agreement can be viewed as one which clears up historic issues relating to the offshore, but also sets some significant precedents for future activity.

The negotiations that led to the Agreement were prompted by a commitment in the 2005 Atlantic Accord deal between Canada and the Province. That deal was primarily a financial arrangement, dealing with the treatment of petroleum resources under equalization (and a $2.0 Billion contribution toward the Province’s debt). It also included a commitment that by 2019, Canada and the Province would review the extent to which the original 1985 Atlantic Accord objectives were being met, including the Province’s position as principal beneficiary of the benefits of the offshore. The 2019 Agreement expressly states it signifies the end of that process.

The CHHC dividend-backed revenue stream resolves (presumably) a long standing policy objective of the Province, dating back to the 2007 Energy Plan and before, of acquiring Canada’s CHHC interest. This equity interest is a historical anomaly; it arose through an emergency investment by the Government of Canada in 1993 into the then uncertain Hibernia Project, upon the pull out of Gulf Canada as a 25% partner. The Government of Canada invested around $430 million at that time; it has subsequently received over $2 Billion in dividends and other revenue from the interest. The Province has pursued ownership of the interest on the basis that it, and not Canada, was supposed to be the principal beneficiary of offshore activity. The revenue stream contained in the Agreement is based upon a projected dividend stream from CHHC over the remaining life of the Hibernia Project, with Canada agreeing to top up the actual dividend if it is insufficient to meet the commitment to the Province, but also reserving any additional dividend in excess of the commitment. The Province has stated in media interviews it chose this risk-free dividend stream as opposed to the upside and downside risk of holding the equity itself.

The most potentially controversial new issue is the acknowledgement of the intersection between petroleum development and marine protected areas. As part of its overall marine conservation strategy, Canada had proclaimed the Northeastern Slope Marine Refuge off northeastern Newfoundland, encompassing a significant portion of the area known as the Orphan Basin, and had closed the area to fishing activity. However, this declaration had not affected petroleum development in the area because of the joint management arrangements under the 1985 Atlantic Accord. As a result, the CNLOPB has continued to issue exploration licenses for the Orphan Basin area. The Agreement contains the first acknowledgement of a reconciliation of the two schemes – the express acknowledgement that exploration can continue in the Orphan Basin, but a commitment that it will not occur in the area of the proposed Laurentian Channel Marine Protected Area.

There is also the commitment to spend the next two years reviewing various joint management parameters such as land tenure, worker safety, regulatory efficiency and regulator modernization. This appears to be a commitment that follows the intention of the joint management commitments in the original 1985 Atlantic Accord. It also means that this 2019 Agreement is likely not the last such agreement in the near future.

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