ARCHIVED — Vol. 146, No. 6 — February 11, 2012

Crown Share Adjustment Payments Regulations

Statutory authority

Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act

Sponsoring department

Department of Natural Resources

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue and objectives

The Minister of Natural Resources is obligated under sections 246 to 249 of the 1988 Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (the Accord Act) to make Crown Share Adjustment (CSA) payments to the Province of Nova Scotia from the Consolidated Revenue Fund.

Previous CSA payments have been made to Nova Scotia from the Government’s Management Reserve (in 2008) and from the Economic Recovery Act (stimulus) [2009]. The 2008 payment of $234.4 million compensated Nova Scotia for Crown share up to the period ending March 31, 2008. The payment under the Economic Recovery Act (stimulus) of $174.5 million provided the CSA owed to the province for fiscal years 2008–09 and 2009–10.

The objectives of the Regulations are to enable the Minister of Natural Resources to make future CSA payments to Nova Scotia from the Consolidated Revenue Fund, pursuant to the Accord Act, by

  • articulating a methodology for calculating CSA payments due to Nova Scotia;
  • identifying where the information to calculate the CSA payments is to be obtained; and
  • prescribing administrative procedures for rectifying overpayments and underpayments to the Province.

Description and rationale

The Government of Canada obtained a 25% carried interest in all offshore projects under the National Energy Program (NEP) which was initiated in 1980. The Province of Nova Scotia subsequently negotiated the right to acquire 25% and 50%, respectively, of any federal interest in oil and natural gas projects in the Nova Scotia offshore area under the 1982 Canada-Nova Scotia Agreement on Offshore Oil and Gas Resource Management and Revenue Sharing (the 1982 Agreement.) The Government dismantled the NEP after the 1984 election but Nova Scotia subsequently negotiated Crown Share Adjustment payment provisions as part of the 1988 Accord Act. These provisions of the Accord Act essentially provide Nova Scotia with an equivalent financial benefit to what it would have achieved had it been able to exercise its Crown share right under the 1982 Agreement.

The Accord Act, however, did not include a methodology for calculating CSA payments and this led to a long-term disagreement between Canada and Nova Scotia. This matter was not resolved until Prime Minister Harper and then Nova Scotia Premier Rodney MacDonald established a federal-provincial panel in October 2007 to address outstanding issues. The panel subsequently issued its report on July 4, 2008, and both governments endorsed the panel’s recommendations on July 13, 2008. The panel’s recommendations included a methodology for calculating CSA payments due to Nova Scotia; direction on how to obtain the information needed to calculate the CSA payments; and administrative procedures for rectifying any CSA overpayment or underpayment to the province.

Implementation of the panel’s recommendations necessitated legislative amendments to the Accord Act which were included as part of the Economic Recovery Act (stimulus) [2009]. In order for the Minister of Natural Resources to make future CSA payments under the Accord Act, new regulations pursuant to the 2009 legislative amendments need to be promulgated.

The proposed Regulations meet each of the three objectives articulated above. They include a methodology for determining the annual returns that Nova Scotia would have been entitled to from each offshore project, had it had the opportunity to exercise its Crown share right. In order to be eligible to receive CSA payments, the methodology requires that the projected Nova Scotia share of profits from an offshore project must first meet a specified threshold rate of return, i.e. an annual rate of return on invested capital equal to the lesser of (a) 20% or (b) the aggregate of 7% and the average annual cost to the Province of borrowing money. The methodology provides direction on how to calculate the “average annual cost to the Province of borrowing money.” It also includes detailed formulae for determining the profitability of each project based on actual data from the project operator, including information on capital investment, operating expenses, production levels, oil and gas prices, etc.

The proposed Regulations also stipulate that the data needed to calculate CSA payments will come from existing federal and provincial sources and from oil and gas companies active in the Nova Scotia offshore area. Most of the information that the Minister of Natural Resources will need is already provided by the companies to the Government of Nova Scotia for royalty administration purposes or to the Canada-Nova Scotia Offshore Petroleum Board (CNSOPB) for its regulatory oversight function. Some of the data needed from companies (for example, tariff revenue from other projects and allocation of project costs between oil and gas) may not be provided for royalty and CNSOPB regulatory purposes, but the companies would have already compiled much of this data as part of their investment decision to proceed with the project.

Administrative arrangements will be developed to minimize the regulatory burden on companies. For example, information sharing protocols will be established to enable provincial royalty information to be shared with the federal government. The Minister of Natural Resources already has access to data in development plans and the like, as the CNSOPB is an arm’s-length regulator that reports to the federal and provincial Ministers responsible for offshore oil and gas.

The proposed Regulations also address administrative arrangements for managing any overpayments or underpayments. Should overpayments or underpayments occur, these would be addressed by making an offsetting adjustment to the next Crown Share Adjustment payment due to the province.

Promulgation of the Regulations would provide efficiency benefits by enabling the Minister of Natural Resources to make future payments to Nova Scotia in a timely manner. This method of payment will be more administratively efficient and certain than that for the previous approach of including the CSA payments as part of the annual federal budget process.

There may be an incremental cost for industry to provide additional data to Canada to calculate CSA payments, but this will be insignificant. Companies already maintain the data that is needed to compute the calculations for provincial royalty purposes or federal regulatory purposes. During the consultation process, we specifically addressed data issues with company officials who confirmed that the bulk of the data needed to calculate CSA payments is readily available.

Consultation

The Province was heavily consulted during the drafting of the Regulations over the 11-month period from January to November 2011. The Nova Scotia Minister of Energy, the Honourable Charlie Parker, wrote his federal counterpart, the Honourable Joe Oliver, Minister of Natural Resources, on December 6, 2011, to approve of the recommendations, pursuant to section 6 of the Accord Act. In approving the Regulations, the Government of Nova Scotia has agreed that the Regulations are consistent with the recommendations of the panel, which both levels of government endorsed on July 13, 2008.

ExxonMobil, the operator of the only producing offshore petroleum project in Nova Scotia, and Encana, the operator of a project which is expected to come on-stream in 2012, were also consulted on the draft Regulations. These consultations were undertaken jointly with officials from the Nova Scotia Department of Energy involved in developing the Regulations. NRCan and Nova Scotia officials met with company officials to provide in-depth briefings on the proposed Regulations in August 2011. Special attention during these meetings was directed to the data requirements from industry. ExxonMobil and Encana company officials indicated that the bulk of the information needed to calculate CSA payments is readily available. Neither company raised the cost of providing any incremental information needed to calculate CSA payments as an issue.

Consultations were not undertaken with the general public. As the Regulations enable the Minister of Natural Resources to calculate and make CSA payments to the Province, the regulatory proposal essentially amounts to a federal transfer to the province. Estimated to be from $12 million to $15 million annually for the next several years, this is an insignificant sum compared to other federal transfers that Nova Scotia receives. Future CSA payments are therefore not anticipated to generate any significant public interest.

Implementation, enforcement and service standards

Subsection 247(4) of the Act stipulates that CSA payments shall be made to Nova Scotia by September 30 of the current fiscal year in respect of the previous fiscal year. The CSA payment for fiscal year 2010–11 will not meet this timeline but will be made as soon as possible following the promulgation of the Regulations, most likely by March 31, 2012. In fiscal year 2012–13, Natural Resources Canada will commence the processing of the 2011–12 CSA payment in April, with the objective to have the CSA payment made to Nova Scotia by June 30, 2012. The Senior Policy Advisor, Frontier Lands Management Division, responsible for the CSA file will monitor progress in processing the payment on a weekly basis to ensure that the June 30 timeline is met.

Contact

Keltie C. Voutier
Senior Policy Advisor
Frontier Lands Management Division
Natural Resources Canada
580 Booth Street, 17th Floor
Ottawa, Ontario
K1A 0E4
Telephone: 613-995-0138
Email: kvoutier@nrcan.gc.ca

PROPOSED REGULATORY TEXT

Notice is hereby given, pursuant to subsection 154(1) of the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (see footnote a), that the Governor in Council, pursuant to sections 153 (see footnote b) and 248 (see footnote c) of that Act, proposes to make the annexed Crown Share Adjustment Payments Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Keltie Voutier, Senior Policy Advisor, Natural Resources Canada, Frontier Lands Management Division, 580 Booth Street, Ottawa, Ontario K1A 0E4 (email: kvoutier@nrcan.gc.ca).

Ottawa, February 2, 2012

JURICA ČAPKUN
Assistant Clerk of the Privy Council

CROWN SHARE ADJUSTMENT PAYMENTS
REGULATIONS

INTERPRETATION

1. (1) The following definitions apply in these Regulations.

“Act” means the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act. (Loi)

“conversion date” means the day that is 30 days after the day on which the Board’s fundamental decision to approve the development plan is implemented. (date de conversion )

“gross revenues” in relation to a project, includes production revenues as determined using prices of oil, natural gas and NGL at the project boundary, insurance proceeds, asset sale proceeds and revenues derived from the provision of a service for another project in relation to the production of oil, natural gas and NGL in the offshore area. (recettes brutes)

“income tax payable” means the corporate income tax payable for the year under the Income Tax Act, Chapter 217 of the Revised Statutes of Nova Scotia, 1989, on the Provincial Crown share of the project. (impôt sur le revenu à payer)

“NGL” means natural gas liquids — including propane, butane, ethane and condensates — derived from the production of natural gas. (LGN)

“project boundary” means the location at which the product leaves the infrastructure as set out in the development plan for the project. (limite du projet)

“Provincial Crown share”is an amount that is equal to 12.5% in the case of natural gas and NGL production and 6.25% in the case of oil production. (part de la Couronne provinciale)

(2) The calculations set out in sections 4 and 6 shall be made in respect of each of the oil, natural gas and NGL components of a project, if the project consists of at least 2 of those components.

FORECASTS

2. Any forecast referred to in these Regulations, other than one provided in the development plan under section 7, shall be the average of the forecasts made closest to the date of conversion by three independent organizations designated jointly in writing by the Federal Minister and the Provincial Minister.

ANNUAL AVERAGE COST OF BORROWING

3. (1) For the purposes of the definition “average annual cost to the Province of borrowing money” in subsection 246(1) of the Act, the average annual rate of interest is equal to

  1. (a) the weighted average of the effective yield on all outstanding debt instruments, including promissory notes, issued by the Province during the 12-month period immediately preceding the date of calculation of the rate of return referred to in subsection 247(2) of the Act adjusted for the effect of any debt swap arrangements in effect during that period; or

  2. (b) if the Province has issued no debt instruments in that period, the average of long term Government of Canada benchmark bond yields for that period.

(2) The Provincial Minister shall provide to the Federal Minister a list, certified by an independent auditor, of the debt instruments that includes their dates of issuance, dates of maturity and their effective yields.

CROWN SHARE ADJUSTMENT PAYMENT

PROFIT REALIZED

4. For the purposes of subsection 247(1) of the Act, the profit realized for a year is equal to the amount determined by the following formula:

A × (B – C) – D

where

A is the Provincial Crown share;

B is the gross revenues of the project for the year;

C is the sum of the project operating costs, the project capital costs and the project royalties payable under the Offshore Petroleum Royalty Act for the year;

D is the sum of the provincial capital loan repayment for the year determined under subsection 9(1), the acquisition payment for the year determined under subsection 10(1) and the income tax payable for the year.

INFORMATION REQUIRED TO DETERMINE
PROFIT REALIZED

5. (1) The operator of a project shall, over the life of a project beginning on the day on which the development plan is submitted under subsection 143(2) of the Act, provide the following information to the Federal Minister no later than June 30th of each year for the preceding year:

  1. (a) the project operating costs;

  2. (b) the project capital costs categorized in accordance with their tax treatment; and

  3. (c) at the request of the Federal Minister, any other information necessary to determine the profit in relation to a project or to verify the accuracy and completeness of the information provided under this section.

(2) An interest holder, as defined in section 49 of the Act, shall, over the life of a project beginning on the day on which the development plan is submitted under subsection 143(2) of the Act, provide the following information to the Federal Minister no later than June 30th of each year for the preceding year:

  1. (a) the project gross revenues;

  2. (b) any information provided under the Offshore Petroleum Royalty Act for the purpose of the calculation of the royalties payable under that Act in respect of the project; and

  3. (c) at the request of the Federal Minister, any other information necessary to determine the profit in relation to a project or to verify the accuracy and completeness of the information provided under this section.

(3) If information provided for any year is inaccurate or incomplete, the Federal Minister shall, as soon as feasible, request accurate and complete information.

RATE OF RETURN OF THE PROJECT

6. (1) For the purposes of subsection 247(2) of the Act, the rate of return in respect of the project that would have been obtained on behalf of Her Majesty in right of the Province is equal to the interest rate that would make the net present value of the provincial cash flow, calculated over the life of the project beginning on the conversion date, equal to zero.

(2) The provincial cash flow for a year is the amount determined by the following formula:

A × (B1 – C1) – D1

where

A is the Provincial Crown share;

B1 is the project gross revenue for the year determined under section 8;

C1 is the sum, for the year, of the project operating and capital costs, as specified in the development plan approved in respect of the project under section 143 of the Act converted to current dollars using the forecasted Canadian GDP deflator in that year, and the project royalties that would be payable under the Offshore Petroleum Royalty Act; and

D1 is the sum of the acquisition payment determined under subsection 10(1) and the income tax payable for the year.

(3) The calculation made under subsection (2) shall be based on the mean production scenario provided in the development plan.

(4) If the Federal Minister determines that the rate of return in respect of a project meets the requirements of subsection 247(2) of the Act, no further determination shall be made under that subsection due to an amendment to the development plan unless the amendment is in respect of a new pool or field.

INFORMATION REQUIRED IN DEVELOPMENT PLAN

7. For the purposes of paragraph 143(3)(b) of the Act, Part Ⅱ of the development plan shall include,

  1. (a) for a mean production scenario,

    1. (i) a forecast of the annual project operating and capital costs over the life of the project in constant dollars and in accordance with their income tax treatment,

    2. (ii) the pre-development costs in constant dollars,

    3. (iii) the forecast volume of annual production of NGL and crude oil over the life of the project in cubic metres, and

    4. (iv) the forecast volume of annual production of natural gas over the life of the project in gigajoules;

  2. (b) the forecast annual difference over the life of the project in constant US dollars per cubic meter between

    1. (i) the crude oil price at the project boundary and the West Texas Intermediate (WTI) crude oil price at Cushing, and

    2. (ii) the NGL price at the project boundary and the WTI crude oil price at Cushing;
  3. (c) the forecast annual difference over the life of the project in constant US dollars per gigajoule between the natural gas price at the project boundary and the natural gas price at Henry Hub; and

  4. (d) the forecast of any other annual gross revenues over the life of the project in respect of the project in constant dollars.

PROJECT GROSS REVENUES — RATE OF RETURN

8. (1) For the purposes of subsection 6(2), the project gross revenue for a year is equal to the sum of

  1. (a) the forecast volume of the crude oil production in the year multiplied by the forecast crude oil price in that year;

  2. (b) the forecast volume of natural gas production in the year multiplied by the forecast natural gas price in that year;

  3. (c) the forecast volume of NGL production in the year multiplied by the forecast NGL price in that year; and

  4. (d) the forecast of any other gross revenues in respect of the project in that year multiplied by the forecast GDP deflator for the year.

(2) The forecast crude oil, natural gas or NGL sale price for a year is equal to the amount determined by the following formula:

(P + E) × I × PFX

where

P is

  1. (a) in the case of NGL or crude oil, the forecast WTI crude oil price at Cushing in constant US dollars per cubic meter; or

  2. (b) in the case of natural gas, the forecast natural gas price at Henry Hub in constant US dollars per gigajoule;

E is

  1. (a) in the case of NGL or crude oil, the forecast difference in constant US dollars per cubic meter between the crude oil price or the NGL price, as the case may be, at the project boundary and the WTI crude oil price at Cushing; or

  2. (b) in the case of natural gas, the forecast difference in constant US dollars per gigajoule between the natural gas price at the project boundary and the natural gas price at Henry Hub;

I  is the forecast US GDP deflator for the year; and

PFX  is the forecast price in dollars of one US dollar for the year.

PROVINCIAL CAPITAL LOAN REPAYMENT

9. (1) The provincial capital loan repayment is equal to the amount determined by the following formula:

A × (B – C)

where

A is the Provincial Crown share;

B is the gross revenue of the project for the year; and

C is the sum of project operating costs, project capital costs and the project royalties payable under the Offshore Petroleum Royalty Act for the year.

(2) The provincial capital loan repayments shall be considered during the period beginning in the year in which the cash flow first becomes positive and ending in the year in which the sum of the repayments considered is equal to the cumulative cash flow, plus interest, from the conversion date until the year prior to the year in which cash flow first becomes positive. Any years of negative cash flow after this period shall not be considered for the purposes of determining Crown share adjustment payments.

(3) Interest referred to in subsection (2) shall be calculated annually using either

  1. (a) the weighted average of the effective yield on all outstanding debt instruments, including promissory notes, issued by the Province during the year adjusted for the effect of any debt swap arrangements in effect during that year; or

  2. (b) if the Province has issued no debt instruments in that year, the average of long term Government of Canada benchmark bond yields for the year.

(4) In this section “cash flow” means the amount determined by the following formula:

A × (B – C) – D2

where

A is the Provincial Crown share;

B is gross revenue of the project for the year;

C is equal to, for the purpose of

  1. (a) the description of D in section 4, the sum of the project operating and capital costs, and the project royalties payable under the Offshore Petroleum Royalty Act for the year; and

  2. (b) the description of D1 in subsection 6(2), the sum of the project operating and capital costs, as specified in the development plan approved in respect of the project under section 143 of the Act converted to current dollars using the forecasted Canadian GDP deflator in that year, and the project royalties that would be payable under the Offshore Petroleum Royalty Act for the year; and

D2 is the income tax payable for the year.

ACQUISITION PAYMENTS

10. (1) The acquisition payment for a year is equal to one half of the net revenue for the year.

(2) The net revenue is equal to the amount determined by the following formula:

A × (B3– C3)

where

A  is equal to the Provincial Crown share;

B3 is equal to, for the purposes of

  1. (a) the description of D in section 4, the project gross revenues for the year; and

  2. (b) the description of D1 in subsection 6(2), the project gross revenues determined under section 8 for the year.

C3  is equal to, for the purposes of

  1. (a) the description of D in section 4, the sum of the project operating and capital costs, and the project royalties payable under the Offshore Petroleum Royalty Act for the year; and

  2. (b) the description of D1 in subsection 6(2), the sum of the project operating and capital costs, as specified in the development plan approved in respect of the project under section 143 of the Act converted to current dollars using the forecasted Canadian GDP deflator in that year, and the project royalties that would be payable under the Offshore Petroleum Royalty Act for the year.

(3) The acquisition payments shall be considered beginning from the year in which the cumulative net revenue since the conversion date becomes positive until the year in which the sum of the acquisition payments taken into consideration is equal to the sum of the incentives — adjusted in accordance with the following formula — that were paid in respect of the project under the Petroleum Incentive Program Act, chapter 107 of the Statutes of Canada, 1980–81–82–83, from the conversion date, plus simple interest:

2.5 × A × H × (1 + 0.01n)

where

A  is equal to the Provincial Crown share; and

H  is 25% of the eligible costs and expenses in respect of which an incentive was made under the Petroleum Incentive Program Act and which have not already been considered in the calculation of a Crown share adjustment payment in respect of another project; and

n  is the number of months in the period beginning the month following the month on which the petroleum incentive referred to in element H was made and ending the month of the conversion date.

(4) Simple interest shall be calculated annually based on the annual average of long term Government of Canada benchmark bond yields.

FISCAL INCENTIVES

11. (1) For the purposes of paragraph 247(3)(b) of the Act, a copy of any proposed fiscal incentive or other benefit shall be provided to the Provincial Minister for approval.

(2) The Provincial Minister has 60 days from the date of reception of the copy of the proposed fiscal incentive to approve of it. However, the deadline may, on request, be extended by up to 30 days in circumstances beyond the control of the Provincial Minister. If there is no response within the deadline, the Provincial Minister shall be considered to have given its approval.

12. If the aggregate amount of fiscal incentives or other benefits for a project for a fiscal year is greater than the Crown share adjustment payment for the project for the year, the difference shall be included in the aggregate amount of fiscal incentives for the following fiscal year.

DELAY OF CROWN SHARE ADJUSTMENT PAYMENT

13. If the information referred to in subsection 5(1) or (2) is provided after the time required, the Crown share adjustment payment may be made later than the day referred to in subsection 247(4) of the Act.

RECOVERY OF OVERPAYMENT

14. The amount of any overpayment made for a fiscal year shall be subtracted from the Crown share adjustment payment for subsequent fiscal years until all of the overpayment has been recovered.

PAYMENT OF UNDERPAYMENT

15. If the Federal Minister determines that there has been an underpayment of any Crown share adjustment payment for a fiscal year, the amount of the underpayment shall be added to the Crown share adjustment payment for the fiscal year following the determination.

COMING INTO FORCE

16. These Regulations come into force on the day on which they are registered.

[6-1-o]

Footnote a
S.C. 1988, c. 28

Footnote b
S.C. 1992, c. 35, s. 101

Footnote c
S.C. 2009, c. 31, s. 50