Ottawa, N.L. disagree on who will foot hefty Bay du Nord royalty bill

Canada could soon be the first country on Earth to pay millions of dollars in international oil royalties as a consequence of the Bay du Nord megaproject in Newfoundland and Labrador's offshore — but just how that bill gets paid remains to be seen.

Article 82 of the United Nations Convention on the Law of the Sea (UNCLOS) allows countries like Canada — known as "broad margin" states that have larger-than-normal continental shelves — to extract offshore oil beyond their 200-nautical-mile limit.

But that extraction comes with a catch: broad margin states must pay royalties on that oil, money which then gets redistributed to developing countries.

Bay du Nord, spearheaded by Norwegian oil giant Equinor, is the first project to move the province's offshore oil industry past Canada's nautical limit and into the deep waters of the Flemish Pass, which sits 270 nautical miles — about 500 kilometres — east of St. John's.

Although Bay du Nord moved closer to commissioning this month – with a green light from the federal environment minister on April 6 – Ottawa and the Newfoundland and Labrador government still haven't agreed on just how the hefty royalty bill resulting from the United Nations convention will be paid.

Michael Gardner, a Halifax-based consultant who previously studied the issue for Natural Resources Canada, said Wednesday that UNCLOS royalties from the project could reach hundreds of millions of dollars.

"It all comes back down to, what are the production levels that you reach and what's the price of oil?" Gardner said.

So, where will that money come from?

The federal government negotiated UNCLOS in the 1970s, and Parliament ratified the document in 2003. Ottawa says the provincial government should help pay the royalties, but the province, which expects to receive $3.5 billion from Bay du Nord, rejects that suggestion outright — and has for years.

"The federal government is the signatory to UNCLOS, and would be responsible for making payments under Article 82," said Andrew Parsons, Newfoundland and Labrador's energy minister, in a statement last week.

"The province does not see a role for itself in this agreement."

The Newfoundland and Labrador government receives all of its offshore revenues through a deal with Ottawa known as the Atlantic Accord.

Ottawa could impose an additional levy on Equinor to help meet its international obligations.

But that approach carries risks, warned Gardner.