Introduction

The Canada-Newfoundland and Labrador Offshore Petroleum Board (Board) is responsible, on behalf of the Government of Canada and the Government of Newfoundland and Labrador, for petroleum resource management in the Newfoundland and Labrador Offshore Area.

The Canada-Newfoundland and Labrador Atlantic Accord Implementation Act and the Canada-Newfoundland and Labrador Atlantic Accord Implementation Newfoundland and Labrador Act (the Acts), administered by the Board govern all petroleum operations in the Newfoundland and Labrador Offshore Area. The Board’s responsibilities under the Acts include: worker safety, environmental protection, issuance and administration of petroleum and exploration and development rights; administration of statutory requirements regulating offshore exploration, development and production; and approval of Canada-Newfoundland and Labrador benefits and development plans.

This document briefly describes the process for the issuance and administration of petroleum exploration and production rights.

Offshore Area

The area within the Board’s administrative jurisdiction is defined in the Acts as the "offshore area." This area is some 185 million hectares and is defined as:

"those submarine areas lying seaward of the low water mark of the Province and extending, at any location, as far as:

1. any prescribed line; or,
2. where no line is prescribed at that location, the outer edge of the continental margin or a distance of two hundred nautical miles from the baselines from which the breadth of the territorial sea of Canada is measured, whichever is greater."

For rights management purposes, the offshore area has been divided into two areas. The first area comprises thirty (30) full grids (some 1.1 million hectares) and is located in the northeast Grand Banks area, while the second area covers the remaining offshore area. The size of parcels to be nominated and the rentals applicable to exploration licences vary according to the areas.

Plan for Interests

Pursuant to the Acts, the Board is required to submit for approval to the provincial and federal Ministers a plan outlining the anticipated decisions of the Board during that year respecting calls for bids and the terms and conditions of any interest to be issued as a result of such call. Lands that are nominated are considered for inclusion in the plan for interests.

Scheduled Land Tenure

In 2013, the Board implemented a Scheduled Land Tenure System designed to provide increased timeframes for calls for bids in more frontier areas of the Canada-Newfoundland and Labrador Offshore Area. The Offshore Area has been divided into eight regions under this system, which have been individually categorized as either low activity, high activity, or mature, based on the level of oil and gas exploration and development activities.

In this system there are three rights issuance timing cycles, corresponding to the activity designations. Low activity – a four year cycle, high activity – a two year cycle, and mature – a one year cycle.

In the Scheduled Land Tenure System, the rights issuance cycle will commence with a call for nominations (Areas of Interest). The Board will consider all nominations received and assess the nominations to design a sector, which will be announced early in the process, providing the location of the future call for bids. Subsequent to the Sector Identification, a call for nominations (Parcels) will be made requesting nominations of parcels over the previously identified sector. Parcel nominations will be assessed by the C-NLOPB and used in the design of the call for bids.

Parcel nominations for all other regions not yet publically announced into the Scheduled Land Tenure System are welcome and will be assessed by the Board as received. These nominations would be considered in the one year, call for bids rights issuance cycle.

The identity of the nominee and information concerning any lands nominated is confidential.

Calls for Bids

Upon receipt of Ministerial approval, the Board will initiate a call for bids, normally commencing in early March and closing in November. A call for bids will specify the form and manner in which a bid is to be submitted, any terms and conditions that a bid must satisfy to be considered by the Board, and other terms and conditions subject to which an interest is to be issued. Most importantly, a call for bids must address the sole criterion that the Board will apply in assessing bids that are submitted. This sole criterion is expressed in terms of a cash bonus bid or work expenditure bid.

A call for bids will not close prior to 120 days after the completion of a Strategic Environmental Assessment in relation to those lands.

Cash Bonus Bid/Work Expenditure Bid

A cash bonus bid is expressed in terms of the dollar value a bidder is willing to pay in order to acquire a particular parcel. It is normally applied in assessing bids for parcels located in areas of proven oil and gas reserves (e.g. significant discovery and production licences).

A work expenditure bid is expressed in terms of the amount of money the bidder commits to spend on exploration within the first period of the exploration licence term. This work expenditure bid is fully recoverable against work expenditure that qualifies as an allowable expenditure.

Allowable expenditures are defined in the call for bid package and include expenses related to drilling, geophysical, geological and other surveys/studies.

Bid Deposit & Issuance Fee

Each work expenditure bid package must be accompanied by a bid deposit of $10,000.00 (Cdn.) payable to the Receiver General by bank draft or certified cheque. In the case of a cash bonus bid, a certified cheque payable to the Receiver General for the full amount of the bid must accompany the bid. Furthermore, pursuant to section 14 of the Newfoundland Offshore Area Registration Regulations, the issuance fee – calculated at $250.00 per grid, or portion thereof – must accompany the bid package. Bid deposits or cash bids and issuance fees are returned to unsuccessful bidders.

Security Deposit (Work Expenditure Bid)

A successful bidder is required to post a security deposit for twenty-five percent (25%) of the work expenditure bid within fifteen (15) days of official notification of being a successful bidder. The security deposit is posted in the form of a promissory note accompanied by a bank letter of guarantee. A credit against the security deposit will be made on the basis of twenty-five percent (25%) of allowable expenditures. This credit is applicable against the security deposit during the first period of the exploration licence term. Upon receipt of the security deposit, the bid deposit is returned to the successful bidder, and the issuance fee cheque deposited to the account of the Receiver General.

Environmental Studies Research Funds (ESRF)

Upon issuance of a licence, the interest owner shall pay those ESRF levies established by the Environmental Studies Management Board pursuant to section 81 of the Canada Petroleum Resources Act.

Exploration Licence

Upon receipt of the security deposit, and Ministerial approval, an exploration licence is issued to the successful bidder. An exploration licence confers:

1. the right to explore for, and the exclusive right to drill and test for, petroleum;
2. the exclusive right to develop those portions of the offshore area in order to produce petroleum; and
3. the exclusive right, subject to compliance with the other provisions of the Act, to obtain a production licence.

The term of an exploration licence shall not exceed nine (9) years. In the offshore area, exploration licences have the maximum nine year (9) term consisting of two consecutive periods referred to as Period I and Period II.

The interest owner is required to drill or spud and diligently pursue one exploratory well on or before the expiry date of period I as a condition precedent to obtaining tenure to period II. Failure to drill or spud a well will result in reversion to Crown reserve of the licence, and forfeiture of the security deposit or any balance thereof.

If the licence requirement is fulfilled, the interest owner is entitled to obtain tenure to period II. The only requirement applicable to period II is the payment, in advance, of annual rentals per the terms and conditions of the exploration licence. For exploration licences continuing in force beyond period II, rentals are payable monthly at one-twelfth (1/12) of the rates applicable during the last year of period II. Rentals are refunded annually to a maximum of one hundred percent (100%) of the rentals paid in that year, on the basis of a dollar refund for each dollar of allowable expenditures for that year. Carry forward provisions to reduce rentals otherwise payable in ensuing rental years apply.

Significant Discovery Licence

At the expiration of the term of an exploration licence, the portions of the offshore area not subject to a significant discovery or production licence become Crown reserve. If a drilling program results in a significant discovery and a declaration of significant discovery has been made, an interest owner is entitled to a significant discovery licence. A declaration of significant discovery is a pre-condition to the issuance of the significant discovery licence. A significant discovery is defined in the Acts as:

"a discovery indicated by the first well on a geological feature that demonstrates by flow testing the existence of hydrocarbons in that feature and, having regard to geological and engineering factors, suggests the existence of an accumulation of hydrocarbons that has potential for sustained production. "

Upon receipt of an application for a declaration of significant discovery, the Board first determines whether a significant discovery has been made, and secondly, if so made, indicates the portions of the offshore area where there are reasonable grounds to believe the significant discovery may extend. The applicant is then notified of the Board’s decision and, pursuant to the Acts, may request a hearing with respect to this decision.

Notwithstanding the above, and pursuant to the Acts, a declaration of significant discovery may be made by the Board on its own initiative.

A significant discovery licence confers the same rights as that of an exploration licence. It is the document of “title” by which an interest owner can continue to hold rights to a discovery area while the extent of that discovery is determined and, if it has potential to be brought into commercial production in the future, until commercial development becomes viable.

A significant discovery licence is effective from the application date and remains in force for so long as the relevant declaration of significant discovery is in force, or until a production licence is issued for the relevant lands. The Crown’s position as resource owner is fully protected, notwithstanding this grant of open-ended tenure, by provisions empowering the making of drilling orders, and in the event the discovery is established to be a commercial discovery, development orders.

Production Licence

Where a commercial discovery is declared, the interest owner is entitled to a production licence. A declaration of commercial discovery is a pre-condition to the issuance of the production licence. A commercial discovery is defined as:

"a discovery of petroleum that has been demonstrated to contain petroleum reserves that justify the investment of capital and effort to bring the discovery to production."

A declaration of commercial discovery is made in accordance with the same procedure as outlined above for a declaration of significant discovery.

A production licence confers:

1. the right to explore for, and the exclusive right to drill and test for, petroleum;
2. the exclusive right to develop those portions of the offshore area in order to produce petroleum;
3. the exclusive right to produce petroleum from those portions of the offshore area; and
4. title to the petroleum so produced.

A production licence is effective from the date it is issued for a term of twenty-five (25) years or for such period thereafter during which commercial production continues.