Last month, the federal government formally approved the contentious Bay du Nord oil development. However, there are still many hurdles for the project to clear, including final sanctioning.
A less discussed aspect of Equinor’s offshore, deepwater project is that it is outside the Canadian 200-nautical-mile limit on the extended Canadian continental shelf. The federal government is a signatory to the United Nations Law of the Sea, and this means that royalties can be paid to the International Seabed Authority if proponents wish to continue with the development of the project.
The Newfoundland and Labrador government has already said it will not pay the royalties. This means that either the federal government will have to pay for them or impose a levy on Equinor to do so. Equinor has said, “decision-making regarding the implementation of UNCLOS (United Nations Convention on the Law of the Sea) royalties rests with the Government of Canada.” If Canada pays these royalties, it would be the first country in the world to do so.
A subsidy by any other name
Arguably, if either level of government pays international royalty fees, it would be a subsidy to an oil company. That would be both a bad investment decision and terrible climate policy. The International Energy Agency has stated that the world already has enough oil to get us to net-zero by 2050 and that we could be at peak oil by 2025 based on current climate change agreements.
During the 2021 election, the Liberal Party of Canada committed to developing “a plan to phase out public financing of the fossil fuel sector, including from Crown corporations, consistent with our commitment to reach net-zero emissions by 2050.” The Liberals also committed to Canada accelerating on the G20 commitment to eliminate subsidies by 2025, promising to do so by 2023.
According to Le Devoir, the Liberal government paid out $18 billion to oil companies in 2020. This was more money than Stephen Harper’s Conservative government gave the oil industry in a single year. The Liberal government has long argued that what qualifies as a subsidy should be more narrowly defined. In fact, recent governments have often tried to narrowly define what exactly qualifies as an oil subsidy.
We need to rethink subsidies
Since 2019, research published by the International Monetary Fund (IMF) has argued that we need to broaden the definition of what qualifies as a fossil fuel subsidy in order to achieve efficient pricing. It maintains that governments should factor in the costs of climate change such as forest fires, flooding, health care and pollution into the money that counts as a fossil fuel subsidy.
Opinion: If Canada pays royalties for @Equinor's contentious Bay du Nord oil development off the Newfoundland coast, it would be the first country in the world to do so, writes @drlorileeoates. #BayduNord #FossilFuels #CdnPoli #ClimateCrisis
This research also found that when these indirect subsidies are included, Canada subsidizes fossil fuels to the amount of $60 billion annually. Even by narrow definitions, Canada’s oil sector is one of the most highly subsidized in the world. In 2020, even as global financial experts were recommending a green recovery in the face of the COVID-19 oil shock, Canada recovered oil at 10 times the G20 average.
More recent research published by the IMF maintains that globally, fossil fuels are subsidized to the tune of $11 million a minute. It is time to recognize this is not an industry that can survive without massive government support. This is as true in Canada as it is anywhere in the world.
We do not yet know what the Bay du Nord royalty regime will look like. Newfoundland and Labrador’s Industry, Energy and Technology Minister Andrew Parsons has said a public stake in Bay du Nord is still an option. If Equinor is asked to pay international royalties, there is a very good chance it will expect to deduct these royalties from the province’s portion of project revenue.
In 2021, Suncor threatened to pull out of the Terra Nova project in Newfoundland and Labrador and was granted an additional $500 million from government, including a reduction in provincial royalties. This was before Suncor returned $3.9 billion to shareholders at the year-end.
After the coronavirus oil shock, almost $1 billion was paid out to oil companies to keep the Newfoundland and Labrador industry going. Oil production revenue is projected to decline to 10 per cent of provincial revenue this year from its high of 32 per cent.
At some point, taxpayers are going to have to decide that the oil industry is a bad investment. The money should be put into a just transition, which would also have the advantage of saving the planet and positioning petro provinces to take part in the emerging global green economy. Now would be a good time to start.
Lori Lee Oates is an instructor in the Faculty of Humanities and Social Sciences at Memorial University of Newfoundland and Labrador. She is also a member of the editorial board of the Network in Canadian History and Environment (NiCHE). Her current research explores the imperial roots of the climate crisis and the political economy of oil.