Hibernia royalty wrangle on way to N.L. Supreme Court

The Newfoundland and Labrador government is embroiled in another dispute over the calculation of offshore oil royalties, this time involving the Hibernia field.

The province has filed a Supreme Court of Newfoundland and Labradorapplication seeking to have a previous decision by an independent arbitrator set aside.

In the simplest terms, that panel of arbitrators ruled that certain insurance expenses were in fact deductible when it came to calculating royalty payments for Hibernia.

While there does not appear to be a dollar value referenced anywhere in court documents, the oil companies indicated to the arbitration panel that a decision against them would "bring about a windfall for the province."

Neither side is commenting on the potential amount of cash at stake.

We are aware of the province's application to set aside the decision, andHiberniaowners will oppose the application.- MargotBruce-O'Connell of HMDC

"We are not planning to speak to the financial implications," Margot Bruce-O'Connell, public and government affairs manager for the Hibernia Management and Development Company Ltd. (HMDC), wrote in an email to CBC News.

"We are aware of the province's application to set aside the decision, and Hibernia owners will oppose the application."

The Department of Natural Resources replied to CBC News interview requests with a one-line statement that sidestepped inquiries about how much money is on the line.

"The provincial government remains committed to ensuring that it receives a fair share from resources and is hopeful that the appeal regarding Hibernia royalties will be resolved in a manner which is fair to the people of the province," that email noted.

Arbitrator ruled against province

The arbitrator's original decision explains how the conflict played out.

When production began at Hibernia in 1997, HMDC acquired operating insurance on a joint basis on behalf of all the owners. The costs were processed through the joint account for Hibernia, and accepted by the province.

But beginning in 2002, the oil companies dropped that joint policy and instead each acquired their own insurance. "This arrangement continues to the present day," the arbitrator's decision notes.

Nine years later, the province disallowed these insurance costs all the way back to 2002.

"The province emphasized that as the cost of individual coverage does notflow through joint account, it lacked necessary oversight," the arbitrator's decision says.

The oil companies including ExxonMobil Canada, Chevron Canada, Suncor Energy, Murphy Oil and Statoil Canada sent the matter to arbitration in 2013.

Less than three months ago, the arbitration tribunal issued a 78-page decision siding with the oil companies and flatly rejecting the province's arguments.

"It is beyond our comprehension that [the oil companies] would have entered into an agreement between themselves, involving a project of this magnitude, and not offer the flexibility of the two alternatives for providing operating insurance, especially if in doing so, they eliminated the most attractive alternative from a corporate perspective," the decision notes.

"Such an interpretation would be contrary to sound commercial principles and good business sense."

That arbitration panel decision dealt specifically with insurance costs for the years 2002 through 2005.

Terra Nova dispute also ongoing

The government's application to have that decision set aside is due to come before a judge this month.

However, the Hibernia dispute is not the only royalty-related matter headed to the courts.

As CBC News reported last month, the companies running the Terra Nova offshore oil project are going to court over how the province calculates royalties there.

• Terra Nova project partners sue over royalty calculations

The oil companies believe they are being forced to pay both levels of royalties in certain circumstances when they move from one royalty tier to the next something they say was never the intent of the system.

The current Terra Nova proceedings follow a previous dispute that was settled out of court in 2010.