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  1. The Terra Nova Project
  2. Regulatory Framework
  3. Letter of Intent
  4. Fiscal Terms
  5. Newfoundland and Labrador Benefits Principles
  6. Offshore Safety and Environmental Protection Approvals Process

1. The Terra Nova Project

The Terra Nova oil field was discovered in 1984 and is located off the east coast of Newfoundland 350 kilometres east southeast of St. John's. Petro-Canada is the majority interest holder and operator of the project with the other interest holders being Mobil Oil Canada Properties, Husky Oil Operations Ltd., Murphy Oil Company Ltd., Mosbacher Operating Ltd., and Norsk Hydro pending conclusion of the agreement between Petro-Canada and Norsk Hydro.

The Terra Nova consortium has announced they will use a ship-shape (monohull) or semi-submersible platform to produce the Terra Nova field. After giving primary consideration to safety and protection of the environment, these methods appear to be the most economical. Petro- Canada currently has three different alliance contractors assessing the various options available. The GBS is uneconomical because of the specific characteristics of the Terra Nova field (e.g., size).

Each of the alliance contractors will evaluate the feasibility of a concrete monohull or semi-submersible production unit. First production from Terra Nova is scheduled for 2001, but could occur earlier. The Terra Nova oil field is estimated by the Canada-Newfoundland Offshore Petroleum Board (C-NOPB) to contain in excess of 400 million barrels of crude oil and field life is estimated to be 15 to 18 years.

To date, about $400 million has been spent on exploration, delineation and preliminary engineering. The preliminary capital cost estimate to startup is approximately $1.6 billion. Capital and operating costs during production are estimated to be $2.6 billion for the Graben and East Flank portions of the field - excluding transportation costs.

Terra Nova will be developed without government grants or loan guarantees on an internationally competitive basis.

2. Regulatory Framework

Petro-Canada, as project operator, together with the other participants in the Terra Nova oil field development, will file a Development Application for the Terra Nova oil field with the C- NOPB.

The development application includes:

  • a Development Plan containing technical information on the development of the field;
  • a Canada-Newfoundland Benefits Plan;
  • an Environmental Impact Statement;
  • a Socio-Economic Impact Statement;
  • a Development Application Summary.

Filing of the development application signals the beginning of the public and regulatory review of the project which is expected to take about a year. The Terra Nova participants will make a decision on whether to proceed with development once approval is provided by the C-NOPB.

3. Letter of Intent

In December 1994, government officials commenced negotiations with the Terra Nova consortium of the fiscal terms and benefits principles that would apply to the development of the project. In December 1995, Petro-Canada announced its intention to submit a Development Plan Application (DPA) to the C-NOPB subject to obtaining an agreement with the province on fiscal terms and benefits principles. Negotiations with the Terra Nova consortium continued with a view to reaching such an agreement.

In June of 1996, Petro-Canada proposed that a Letter of Intent be signed between government and the consortium members. This Letter of Intent would outline the general business deal with respect to the fiscal terms and benefits principles that would apply to the project. The purpose of this Letter of Intent is to provide some degree of certainty on the fiscal terms and benefits principles that will govern the development of the project. This allows the Terra Nova consortium to file the DPA.

A Letter of Intent was prepared based on negotiations to date. Detailed legal agreements should be concluded by the end of the year. These agreements will be based on the framework established and issues agreed to in the Letter of Intent.

The Letter of Intent and filing of the DPA respecting Terra Nova represent a significant milestone for the Province's emerging oil industry.

4.Fiscal Terms

(i) Royalty

The Terra Nova royalty regime is similar in structure to both the Hibernia royalty regime and the generic offshore royalty regime.

The regime is comprised of the following components:

  • Basic Royalty an ad valorem royalty, increasing from one per cent to 10 per cent of gross revenue as certain levels of production are achieved.
  • Incremental Royalty a two tier profit sensitive royalty which becomes effective after consortium members earn a specified rate of return on their unrecovered costs.
    • Tier I 30 per cent of net revenue after a rate of return of 10 per cent plus the Consumer Price Index.
    • Tier II 12.5 per cent of net revenue after a rate of return of 18 per cent plus the Consumer Price Index.

Consortium members will pay the greater of the Basic or the Incremental Royalty. If Tier II royalty becomes effective, the Tier II royalty rate is in addition to the Tier I royalty rate.

(ii) Consumption Taxes

The rate of retail sales tax (RST) applicable to the project will be 0 percent.

(iii) Corporate Income Taxes

The Terra Nova consortium members have made a commitment to allocate to this province, to the extent permitted by law, corporate income taxes arising from the project.

The rate of corporate income tax applicable to the Terra Nova project will be the lower of the all-province average or the province's rate. The province's rate is currently lower than the all-province average.

These provisions are substantially similar to those contained in the Hibernia agreements.

(iv) GST Harmonization

The Terra Nova consortium will be in the same position after harmonization as they were with the RST exemption.

Government is also exempting the project from any new provincial taxes or increases in existing taxes until production start-up. This is being done to preserve the value of the agreed RST exemption in case new taxes are imposed as a result of harmonization.

(v) Legislative and Regulatory Framework

Government is willing to provide a commitment to maintain substantially the same legislative and regulatory framework applicable to the project as of the effective date of the agreements, provided that this is in the public interest and consistent with governmental responsibilities.

5.Newfoundland & Labrador Benefits Principles

A primary purpose of the Atlantic Accord is to provide for the development of oil and gas resources offshore Newfoundland and Labrador for the benefit of Canada as a whole and Newfoundland and Labrador in particular.

In addition, the proponents of the Terra Nova project have agreed to certain benefits principles:

(i) Newfoundland and Labrador Office

An office is to be established in St. John's, to manage the development, within 60 days following an agreement in principle with the province on benefits, fiscal and regulatory matters.

(ii) Procurement Policies and Procedures

The proponents agree to establish procurement policies and procedures consistent with the requirements of the Atlantic Accord and the C-NOPB. These policies and procedures will include provisions to ensure that Newfoundland and Labrador firms and individuals are provided a full and fair opportunity to provide goods and services to the development.

(iii) Newfoundland and Labrador Construction Facilities

Proponents will encourage the use of, and make potential bidders aware of, existing Newfoundland and Labrador construction, fabrication and assembly infrastructure and direct potential bidders to the appropriate government department/official.

Where fabrication, assembly, outfitting services and/or any necessary modifications to the production system are required, the proponents will use best efforts, consistent with the mode of development and the production system requirements, to cause the work activities to be performed in the province.

(iv) Mode of Development

Safety of the employees and the protection of the environment are the primary considerations in selecting a mode of development. The province recognizes the need for a competitive international bidding process.

The proponents will:

  1. pre-qualify at least three contractor and equipment suppliers alliances to evaluate various development options, and
  2. identify the optimal mode of development for the Terra Nova field (the options evaluated will include a concrete floating platform).

(v) Transshipment Facility

The project proponents commit to transshipment in Newfoundland if transshipment is required to accommodate Terra Nova production and if third parties have committed to the construction of a regional transshipment facility in Newfoundland capable of handling Hibernia crude production volumes at the time of Terra Nova Project Sanction.

(vi) Engineering The proponents agree to use best efforts within the competitive bidding process to cause the project management and engineering work for the production platform, associated subsea facilities, mooring and loading systems and production risers for the development to take place in Newfoundland and Labrador.

(vii) Canadian Flag

The Terra Nova production platform, support vessels and tankers will be Canadian registered and crewed consistent with the employment provisions of The Atlantic Accord.

6.Offshore Safety and Environmental Protection Approvals Process

The safety of workers engaged in offshore activities is an issue of fundamental concern to the industry, regulatory authorities and governments.

Canadian safety standards cover all aspects of offshore operations and are among the most advanced in the world. Regulations applied by other countries to their offshore operations are monitored on an ongoing basis to ensure that Canadian safety standards meet or exceed the best practice internationally.

The safety of the Terra Nova project will be closely monitored and enforced by the C-NOPB.

A Certificate of Fitness must be issued for the production installation. It verifies that the installation is designed, constructed, installed and operated in a manner consistent with the approved Development Plan and with all requisite engineering designs, regulations, and safety standards. This certificate is issued by an approved certifying agency (an independent third party) and is one of the prerequisites for production authorization.

In addition, a Production Operations Authorization is required before commercial production can begin. To obtain this approval, all operating procedures must meet the standards specified in regulations. In addition, contingency plans, the Certificate of Fitness, maintenance and inspection programs and environmental protection plans must be in place and approved at this stage thus ensuring that they meet required safety standards.

The federal and provincial governments and the C-NOPB have entered into a Memorandum of Understanding concerning Environmental Assessment of the Terra Nova Project. This MOU provides for a single hearing process. This is a major step in streamlining the process, saving expenses and ensuring that the concerns and regulatory responsibilities of all parties are addressed. The Terra Nova public review panel will commence its work shortly after the DPA is filed and will file a report within 270 days.

The C-NOPB is responsible for the regulatory management of the Terra Nova field pursuant to the Canada-Newfoundland Atlantic Accord Implementation Acts. These acts establish the environmental requirements that proponents of hydrocarbon projects in offshore Newfoundland must fulfill in order to obtain approval for development applications.

A large body of existing and proposed regulations and guidelines continue to provide a sound environmental management framework. Development Plan Guidelines are also in place to provide direction to proponents for the preparation of the appropriate environmental information needed to process a development application.

1996 08 05                           12:35 p.m.

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